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“Working Capital Management at BSRM Steel”
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Executive Summary
BSRM Steels ltd. is a part of BSRM group. The owner of BSRM group (Mr. Akberali A.
Africawala) introduced BSRM Steels ltd. BSEM Steels is a plant, where producing plain bars.
Plain bar is a most important raw material construction. As we know that home is an essential
need for every human and rod is essential for every human and rod is essential for building
home. BSRM steels want to achieve a lucrative market. We think they can fulfill their target.
They can take market by overcome all barriers. Their main barrier is their competitors. They can
overcome tier weakness and handle their threat.
The purpose of this research is to find out the 4 p’s (product, place, price and promotion)
which make it totally exceptional from others. For this analysis, we had to find target market,
market segmentation, positioning and marketing mix, their major competitors and so far.
In product they give so many services which give the satisfaction to their customer and
they have so many verities and don’t compromise in quality. They take so many steps to set up
right price for their product which don’t disturb their customer and so many steps in promotion
and place.
The basic finding from the analysis what we have got is, BSRM steels is the market
leader, they are very concern about their quality which we had said and they have own brands
and they are trying to make more new brands. They have already covered most or segment of
market. At last they always tried to keep their brand in top of the mind or customers.
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Chapter: 1Company Background
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Introduction
BSRM Steels ltd. provides a valuable ingredient for construction. BSRM (Bangladesh
Steel Re-rolling Mills) group, the first company which set up four manual rolling mills in 1952
in the country. They are the first of making plain bars for construction.
In 1987 an automatic billet based rolling mill was installed with continuous up gradation.
It has a portfolio of business. Now they have an own billet making plat, Meghna Engineering
Works. The two highway bridges over the fivers Meghna and gomuti, the Chittagong airport, the
kafco fertilizer factory and so many high prestigious projects were then built with BSRM bars.
BSRM Steels ltd. is a part of BSRM group. It is the first company of producing brand
product and TMT (Thermo Mechanical Tim) bar. It was certified by ISO. It manufacturing
factory is in Fouzderhat. The equipment of the mill is from abroad. It has a good brand image.
For that they are controlling leadership of market.
BSRM Steels ltd. is also a public company registered with both the Dhaka and
Chittagong Stock Exchanges.
Billet which converts from scrap in their sisters concern Meghna Engineering Works is
the main raw materials. They have so many products but the product which they have only is
grade 500w. This is their brand product. They are trying to produce more new brands for
construction and they try to produce their product keep the future environment position in mind.
Company Background
BSRM Steel ltd. is a company of BSRM groups. BSRM group was started its work in
1952. At that time it was known by East Bengal Steels ltd. Mr. Akberali A. Africawala was the
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founder and chairman of it and Mr. Alihussain Akberali is the present chairman of it. They have
portfolio of business. They have the business of producing re-bars. There is some selected
company’s name
BSRM Wires ltd.
BSRM Recycling ltd.
Meghna Engineering Works ltd. (MEW)
Karnaphuly Engineering Works ltd. (KEW)
Chittagong power company ltd. (CPCL)
Their target market is individual home builders, engineer and architecture. When they
come to the market they have no competitors but now they have so many competitors but they
are in top position in market fro their best quality. They always try to fulfill their customers
demand. At last there is question can rise to everyone’s mind and that is `Do they export their
product`. The answer is “No, they don’t export their product to abroad”.
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Mission Statement
They don’t define their mission statement to give it in market but they are working on it.
They use a slogan for their product “The next generation steel”.
Strategic Vision
BSRM steels have some strategic vision. They try to fill up their following vision.
Be the most acceptable brand all over the country.
Keep the market leadership and raise their image to their customers.
Produce 100% having quality product.
Aware to innovate new product, which has a strong demand in market.
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Market Segmentation
It means dividing the market based on different characteristics. Market segmentation is
very necessary for a company to start a business. Without market segment most of the
companies cannot adopt a profitable business. They divide the market based on geographic and
psychographic segment.
Geographic Segments
They deliver their product inside of Bangladesh such as Dhaka, Rajshahi etc.
Psychographic Segments
In this segment they maintain the social class such as Engineer, Architect, individual
homebuilders.
Target Marketing
All segments are not equally profitable. A company has to select one or two profitable
segments and BSRM steels segment all the individual builders.
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PositioningMarket positioning means how a company wants to see their brand in the mind of
consumer. Because customer look the performance and results of a company. There is
positioning graph of BSRM Steels with their competitors.
__ Position Based on Price and Quality
From above the graph we can see that BSRM steel is fist in the position of their consumer
mind and same position is having in quality. KSRM is medium in those two.
__
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SWOT ANALYSIS
Strengths:
Abundance of Iron-Ore and other minerals for steel
Skilled manpower and low unit labor costs
High ash content of domestic coking coal
Low labor productivity
Weaknesses:
High costs of some basic inputs like power, coal, fuel, etc.
High social costs
Poor quality of basic infrastructure
Distribution network
Low IT usage in efficiency enhancement
Fragmentation
Opportunities:
Low per capita consumption
Unexplored rural market
Low export market penetration
Threats:
Substitution by aluminum, plastic and composites one of the most remunerative
markets – Automobiles
Poor R&D and threat of technological obsolescence in a large part of the market
Availability of imported low ash coking coal.
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Investment management
Human Resource
Improvement and Change management
Order generation
Operation and fulfillment
Supply management
Research and Development
Information management
Social responsibility and corporate services.
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Working Capital Management and profitability index
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WORKING CAPITAL MANAGEMENT
INTRODUCTION
Firms need money to pay for their day to day activities. They have to pay salaries, bills,
suppliers & so on. The funds available to do this, is known as the firms working capital.
Managing the working capital needs of the organization is important, because shortage of
funds could disrupt the day to day operations where as by holding excess funds the
interest burden of the firm starts mounting & eating into its profits.
There are two concepts of Working Capital, Gross Working Capital & Net Working
Capital. Gross working capital is the sum total of all Current Assets, Inventories, Debtors,
Loans & Advances & Cash & Bank balances. Net Working Capital is the difference
between Current Assets & Current Liabilities & therefore represents the funds which the
firm has to finance through Borrowings. A firm needs to invest in Current assets to ensure
Smooth and Uninterrupted Operations. How much the firm invests will depend on its
operating cycle.
Cash flows in a cycle into, around and out of a business. It is the life blood of the business
and it is the primary responsibility of the management to keep it flowing to generate
profits. A profitable business generates cash surpluses, which is used to expand the
business. The faster the Business Expands, the more funds it will require for meeting its
working capital needs. Good management of working capital will generate cash, help to
improve profits and reduce risks.
The two most important elements in the business cycle that absorbs cash are
inventory (Stocks of Raw Materials and Spares, Work in Progress and Finished
Goods) and Debtors (Money to Be Collected from Customers).
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BSRM Steel endeavor to shorten the cycle by (i) collecting money from debtors’ quicker
and (ii) reducing inventory levels relative to sales, so that they have to borrow less one
to meet their working capital needs. As a consequence, the aim is to reduce the interest
burden and free additional funds to support growth in its Operations and Sales.
Working Capital Management includes the following at Tata Steel:
Debtors Management
Bank / Cash Management
Inventory Management
In order to analyze these, we need to go to the nitty-gritty’s of mode of financing by Tata
Steel. These can be explained by the following:
1. O.E. Finance
2. Receivable Purchase
3. Channel Financing
4. L/C and Bill Discounting
5. Overdraft Management
The art of managing credit risk is becoming more challenging than ever. Even a single
event of default of a customer carries huge implications on the bottom line. The closure of
a transaction from Customer Order to Payment realisation is becoming more and more
important in the context of strategic benefits and achieving effective customer
satisfaction. Thus, there is growing need for new tools in order to better understand,
quantify and manage credit risk. Thus, it becomes very important for a corporate to decide
how it shall be satisfying its customers along with managing its impact on the bottom line.
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CALCULATION OF CUSTOMER PROFITABILITY AT BSRM STEEL
Gross Realization – Excise – Freight
= Net Realization
- Cost to serve (calculated on the basis of per tonne of sales)
Sales Commission (paid to the agents)
Handling Charges (consignment agent charges)
Cost of Rejection (quality complaints)
Cost of Credit ( from point of view of inventory raising, charged at the bank
Rate, the average rate being 13% approximately)
Establishment cost of Marketing Division (salaries, advertisements,
Administration)
Inventory carrying costs (even for the consignment agents/conversion agents,
Charged at the bank rate)
= Net of Net Realization
- Cost of production (costs incurred in Chittagong, the costs are standardized per tonne
of sales, which is revised from time to time)
= Net Profitability of the customer
The above calculation is done on a monthly basis for each customer. This profitability
statement forms the basis for deciding whether the company should continue with the
customer or not.
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Credit Worthiness of the customers is assessed on the following parameters:
a. Ability to Pay: Ability to pay is applicable to the organised sector only. It includes
the following: Solvency, Financial Viability, Technological Soundness and Commercial
Feasibility.
b. Willingness to Pay: It is based on judgement of experts and is applicable to both
organised and unorganised sector. It includes the following: Quality of Management,
Credibility, Past Performance and Health of the group Company.
Birth of the Credit Management Department at BSRM Steel
Prior to 1999, there was no separate department to look after the receivables. Initially
people were happy that the plant is producing; there was no focus on sales of the produced
materials. Hence there was a problem of large inventory. Gradually, people started
realizing this and then the started focusing on sales, which lead to huge piling of
receivables or collections. There was hardly any collection done on a regular basis. Since
1999 the entire scenario has again changed. The company started having a separate
department which would look after the collections on a daily basis.
Credit Management Process
BSRM Steel has to continuously decide as to how much credit should be given to its
customers and also the credit limit i.e. their maximum exposure. Prior to given credit, the
credit department analyses the credit worthiness of the customers based on their financial
parameters. This is done with the help of a form in Lotus Notes. At the first place, the
customer puts forward a request for credit to the CAM since they have a direct access to
the CAMs only. Each customer is handled by a separate CAM (Customer Account
Manager). They collect all the required information about the customers and fill the Lotus
Notes form or the CMG Module which has a predefined template. Then the credit limit is
fixed based on their credit evaluation. This credit evaluation also includes factors like the
goodwill of the customer in the market and with their banks, the future prospects of the
company in terms of expansion, etc. While extending credit to the customers it is
communicated to them that their credit limit shall not cross the allotted limit. However, in
certain cases where the customer needs an extension of the limit, they might be granted on
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certain special grounds.
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The company has a wide variety of customers. These are from different categories of
business. They can be either public undertaking or government department or Tata Group
Company or private limited companies or traders or distributors. For credit appraisal and
risk assessment, customers are broadly classified into three groups:
Organised Sector
Private & public ltd companies in the private sector, public sector companies
including government undertaking
Unorganised Sector
Traders, partnership firms, SSI units etc.
Government Departments
Defence, irrigation, Power, Railways, PWD and CPWD
Supporting Sections for CMG Co-ordination
Accounts (Marketing & Sales-Kolkata, Jamshedpur)
Customer Service Department
CRM and HSM, WRM Despatch
Financial Controller – Flat and Long Product
Finance Managers
Tata Ryerson Despatch
Metal Junction
CMIE
Debtor Task force
Legal
Bankers
Internal Customers of CMG Vice President, Flat and Long products
COMS, Flat and Long Products
CSM, Flat and Long Product
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PROCESS OF EXTENDING CREDIT TO THE CUSTOMERS
Whatever be the form of company, in the first place CAMs proceed by obtaining two
copies of their previous years Balance Sheet. Since these companies are listed hence their
Balance Sheet can be relied upon in the process of giving credit. It can tell us about the
value of the company and the amount of working capital the company has. CAMs are
responsible for entering the non-financial information of the company into Lotus Notes
such as the products to be sold, credit period and the nature of the credit, etc. All these
are then send to the Regional Finance Manager (RFM) via an electronic mail, along with
the Balance Sheet of the company, who updates the Lotus Notes with the financials of the
company. The RFM acts as a peer in judging whether the credit should be extended or
not. Thus, they can also reject the credit proposal. Once this is done, it is forwarded to the
Credit Management Group of Kolkata for the final approval. They have the right to
accept, reject or suggests changes for the proposal even if the RFM does not possess any
objection in extending the credit. The CMG assigns and approves the credit limit based
on the recommendations made by the RFM. In case RFM/CMG rejects a credit request,
CAM can appeal directly to COS/COMS for sanction of credit giving justifications. Once
a credit limit is approved, it is saved into the customer database and would form the basis
for future credit transactions with the customer.
In case of Government Departments like Railways, PWD, etc. credit is extended on the
basis of the past track record of the business transaction. These companies do not have a
published Balance Sheet. For such enterprises RFM automatically gives his consent for
the proposal. RFM can reject the same if he has any prior information of the customer
market outstanding or poor payment record or existing dues in other branch. The Tata
Group Companies shall also be considered at par with the Government Departments and
no financials shall be required to approve credit limit for them.
A Private Limited Company or Partnership has a Balance Sheet which cannot be
completely relied upon. Hence they require many more information apart from it. It
includes Credit Limit desired and the payment terms with the customer, monthly lifting
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of the Customer, Future expected monthly business potential, Price negotiated, Credit
NR, Cash NR, Any comfort letter from the customer’s banker / sister company already
dealing with Tata Steel, Past data (max 6 previous months) on Credit, Overdue >6
month, Sales & collection of the customers, Market Information on customers
Turnover, PAT for the last three years, etc.
In case of traders, transactions are made on the basis of the availability of the desired
materials. It can also be on temporary basis. The dealings are finalized with those
Traders who offer highest prices. Their credit worthiness cannot be judged on the basis
of their Balance Sheet or any other financial statement. Credit to a trader is given for a
specific sale and a period. After the sales are complete, the credit continues for the
allotted period and thereafter it is reversed.
Distributors are authorized customers by the Company having a long-term relationship.
They are required to lift a minimum fixed tonnage of materials every month. The credit
limit for them remains valid for the whole financial year. The COM&S or the VP is
responsible for sanctioning of the credit to the distributors.
Debtors Control
After the credit is extended to a customer, the CMG keeps a regular track of the status of
outstanding and overdue. At the beginning of each month, for each customer, Manager-
Marketing sends an Accounts Statement indicating the receivables and overdue
status of the party. In case overdue reaches 50% (and 25% in case of chronic defaulters)
of the total outstanding, system stops any further delivery orders thereby stopping further
sales. In case where customer’s total outstanding has become overdue
> 2 months, while releasing Delivery Order – COM&S will decide on the applicable
ratio on the basis of which supplies will be effected (70:30, 80:20, 90:10 etc.). Collection
under 70:30 rules, means, for every 100 rupees received in advance, material worth
Rs.70/- will be supplied to customer and balance will be adjusted against old dues.
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Along with the control of debtors, their accounts needs to be continuously reconciled
and confirmation should be obtained from the customer at regular intervals as regards of
amount due to him. At the beginning of each month the Marketing Manager sends the
Account Statement to all the customers for confirmation of balances.
Interest Collection for Delayed Payments
Tata Steel charges an interest to its customers if the payment made is late after the due
date. The details on interest payment are mentioned at the time of credit sales in the Sales
Order or the MOU. However, these need to be accepted by the customer. All the
transactions are recorded in the SAP system which acts as a database and which is kept
updated very instant. Thus, when the credit sales are made, all information like invoice
date, interest free credit period, money receipt date, etc. are all recorded in SAP with
respect to separate transaction. Thus, SAP automatically calculates the interest that has to
be charged to each customer for every delay in payment. The CAM takes the SAP report
of interest outstanding for each customer and sends it on a monthly basis to the customer
for collection and follow-up. When the interest amount is received the customer’s account
is set-off against the balance. CAMs review the status of interest accrual, its collection and
reasons for non-recovery quarterly.
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CREDIT MANAGEMENT MODULE (BASED ON LOTUS NOTES)
The Credit Management Module of Tata Steel is maintained in the Lotus Notes. This
module is very exhaustive because it captures all the information about the customer to
whom credit is being given. It begins by capturing the essential information relating to
sales like:
Products to be purchased by the customer
Tonnage on cash
Tonnage on credit
Invoice price (Rs. / MT)
Credit period (Days)
Proposed credit (Rs. Lacs)
Total tonnage
Share of spend (%)
Future expected Monthly lifting potential (MT)
A customer might already have an account with Tata Steel. In such cases the accounts
status of the customer as on the date when credit sales is being made are also entered into
Lotus Notes. These includes the amounts of outstanding and overdue as on a particular
date, Cheque payment history, existing credit limit, interest free credit period, Guarantee
provided, if any, level of secured and unsecured credit. It also mentions whether the
customer’s company has been rated by a credit rating agency or not, how is its relationship
with Tata Steel and what is its level of Management Quality.
This module also asks whether the customer’s company has been referred to the BIFR. All
details of relevant financial figures of the current financial year and the past two years are
recorded in Lotus Notes. Some of such figures are Working Capital, Retained Earnings,
EBIT, Net Worth, Total Assets, Total Liabilities, Debt, Interest on Debt, Equity, Inventory,
Receivables, Sales, PAT, etc. Apart from these absolute figures certain ratios
are also recorded, such as Structural Ratios (Debt-Equity Ratio and Interest Coverage
Ratio), Liquidity Ratios (Current Ratio and Acid Test Ratio), Turnover Ratios (Asset 38
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Turnover Ratio, Inventory Turnover Ratio and Receivable Turnover ratio) and
Profitability Ratios (Gross Profit Margin Ratio and Net Profit Margin Ratio). On the basis
of these financial figures the credit management group calculates the Z-score of the
customer which forms the Corporate Bankruptcy Prediction.
The Z-score formula
It is very essential to know when a company is at risk of corporate collapse. To detect the
signs of looming bankruptcy, investors calculate and analyze all kinds of financial ratios:
working capital, profitability, debt levels and liquidity. However, each of these ratios gives
different implications which might turn out to be contradictory also. Thus, NYU Professor
Edward Altman introduced the Z-score formula in the late 1960s which is weighted of the
five key performance ratios into a single score. This gives a very good overview of the
corporate financial health of a manufacturing company.
The formula8 is as follows:
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where Z = score
A = Working capital / Total Assets
B = Retained earnings / Total Assets
C = Earnings before interest & tax / Total Assets
D = Market Value of Equity / Total Liabilities
E = Sales / Total Assets
The lower the Z-score, the higher are the odds of bankruptcy. A Z-score of lower than 1.8
indicates that the company is heading for bankruptcy. Companies with scores above 3 are
unlikely to enter bankruptcy. Scores between 1.8 and 3 lie in a moderate area.
8 Credit Management Module, Tata Steel 39
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The Z-score for a company can vary from quarter to quarter. To keep an eye on their
investments, investors should consider checking their companies’ Z-score on a regular
basis.
In above figures related to the Z-score is according to the industry as a whole. However, in
Tata Steel the following are used: Above 4 is considered to be low risk, between 4 and 2.6
is considered to be medium risk, less than 2.6 is considered to be high risk and less than
1.1 is a sign of Bankruptcy.
In the credit management module the following are also included:
1. Technology possessed by the customer:
Product Quality
Product Mix
Technical Know How
Power Availability
Process Suitability
Plant / Equipment condition
2. Economic / Commercial factor of the customer:
Product Salability
Raw-Material Availability: Debtors Quality
Labour Relations
Insulation from change in import / local tariff
Compliance with legal / Regulatory Authorities
3. Quality of Management of the customer:
Track Record
Market Reputation
Experience in field
Ownership Disputes (absence of)
Technical Competence
4. Credibility of Management of the customer:
Ethical in business dealings
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Commitment Level
Relationship with Creditor
Relationship with regulatory authorities
Relationship with banks
Relationship with competitors
5. Past performance with Tata Steel
Length of sound dealings
Promptness in payments
Honouring commitments
Payment patterns and adherence to credit terms
Willingness to furnish information
Capacity to hold stocks
Ability to absorb supply spikes
Avoidance of over-trading
6. Health of the group companies
Financial soundness of the group company
Possible diversion of funds to new business ventures (unlikely)
Bank Ratings
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FACTORING OR BILL DISCOUNTING
Tata Steel has two types of customers:
Original Equipment Manufacturers and other manufacturing companies
Distributors
Whatever be the size of business of the customers, there is a persistent risk of failure of the
customers to the company. The larger the volume of debtors, the larger would be the
exposure of the company to the market. Thus, any company would try to convert its
debtors to cash. This can be done either by restricting credit sales to cash sales or by
selling its debtors to various factoring agencies most of which are banks. If sales are made
on cash basis, then the customer can pay the money within 7 days of raising the invoice, in
which case the customer would also be given a cash discount. For sales made on credit, the
company can sell off their debtor which is known as factoring. Factoring helps the
company by providing protection against the bad-debts. Bad-debts result in blocking of
funds of the company and leads to non-conversion of debtors. They act as hindrances in
the existing or new or expanding business. Thus, factoring is used to restrict the bad-debts
and to protect the cash flow of the business.
Factoring has the following advantages:
Risk free sales
Accelerated cash flow
No bad-debt
Saves time spend by CAM’s following up for payment
No legal cost as assignment of Legal Rights will be on Bank
Overdue interest is charged on the Bank’s account.
FACTORING FOR THE MANUFACTURING CUSTOMERS:
The factoring facility that has been designed for customers which are big manufacturers
and high-valued customers is known as OE Finance or Receivable Purchases. Tata Steel
enters into an agreement with a Bank that it would sell off its bills of the debtors. This 42
agreement is known as the Tripartite arrangement which is an arrangement between Tata
Steel, the Bank and the Customer. At the time when the agreement is made, all the
specifications are made clear to Tata Steel and the customer. When an invoice is raised in
the name of a customer, within a day or two it is sent to the bank for discounting. As per
agreement, the Bank entertains these invoices of the specified parties and makes an
upfront payment to Tata Steel of the corresponding amount. For providing the facility of
discounting of the bills, the Bank charges certain interest known as the discounting
charges. This discounting charge is borne by Tata Steel. Thus, Tata Steel gets the debtors
money and the debtors have to pay the Bank at a later date, according to the agreement.
However, the debtors shall be paying after the expiry of the credit period. At the end of the
credit period if the customer fails to pay on time, then Tata Steel is not liable to pay any
overdue interest.
This entire arrangement of factoring is without recourse in nature i.e. if there is any
problem from the side of the customer, then Tata Steel will not take the responsibility for
compensation. Thus, the Bank has to deal with the entire process of the transaction
thereafter.
Calculation of Discounting Charges:
The number of days for which the bill has been discounted is the difference between the
due date when the bill expires and the discounting date. The amount of discounting
charges is calculated on the basis of this along with the rate at which the bank discounts
the bill.
Discounting Charges = Bill Amount * Days Discounting * Rate of discounting.
FACTORING FOR DISTRIBUTORS
The factoring facility that is extended for the distributors of Tata Steel is known as
CHANNEL FINANCE. It helps in meeting the financing needs of the distributors. This
has helped to reduce the capital outlay and improve cash flow position. It provides the
distributors with new sources of funds which help them in carrying out their business 43
with instant payment being made in cash. It reduces the interest rates that the distributors
have to bear and also the facility of upfront cash discount.
Tata Steel carries out its channel financing activities with the help of a separate company
named Metaljunction.com. Thus, the entire factoring of distributors has been outsourced to
an external entity. By doing this, Tata Steel has benefited in the sense that now they can
get the entire payment without the delay due to credit limit, thereby reducing the overall
exposure to uncertainty and chances of bad-debt. The quick receipt of money has now
been possible because of the electronic transfer of money. The arrangement of Channel
Financing is also carried on a non-recourse basis. In case of default by any of the
distributors, Metaljunction.com shall have to handle it. Thus, Tata Steel can very
successfully reduce its working capital in the form of debtors where the chances of
becoming bad if high. Ultimately all this leads to reduction the cost of capital and
specialization in hedging of financial risk of the company.
How does Channel Finance work?
1. Distributor submits documents to Bank
1. TISCO provides LOR & LOC to Bank
2. Bank assigns credit limit to distributor
3. Distributor registers on Metaljunction for transaction
4. Raises a finance request
5. Bank confirms by giving an MRX no. Credits Tata Steel’s account & debits
Distributor account
7. Finance manager makes a Money Receipt
7. Distributor pays bank after credit period along with Interest.
OE FINANCE
OE Finance is arrangement between Tata Steel and the Bank wherein all the prospective
receivables against invoices issued are sold to the bank. It is invoice backed financing for
the purchases made from Tata Steel, on a WITHOUT RECOURSE basis to Tata Steel as
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to principle and overdue interest. The programme size for this is around 150 crores. This
arrangement does not block both Tata Steel’s and the customer’s line of credit because
these are unsecuritized credit given to the party. Currently this type of financing is being
done through Citibank and HDFC bank. The other banks to whom the proposal has been
send are Standard Chartered Bank and Bank of America. It is a Tripartite agreement
wherein the bank finances Tata Steel’s customers so as to enable them to pay early i.e.
before the due date.
OE Finance with HDFC: Under this scheme with HDFC, the tenor is based on the credit
terms that are being offered by Tata Steel which can be upto 90 days. Also the limit which
is set is based on the purchases made from Tata Steel and the internal credit limits setup,
financials of the OE customers and the Bank’s internal credit guidelines. The OE
customers are broadly classified under two categories:
Category A : This includes factoring for large corporate who has or are targeting
corporate banking relationships. For such customers, Tata Steel has to make an
upfront payment of 6.5% to 7.5% interest charges for the period from the date of
transaction to the date of maturity of the invoice. The rate 6.5% shall be for those
who shall agree for direct debit to their account with HDFC Bank.
Category B: These include those customers who are having no banking
relationship with HDFC. Hence it is invoice backed finance. Here, Tata Steel has
to make a monthly payment of interest @ 8.00% to 9.50% p.a.
In case of default in payment by the customers, an overdue penal interest @ 4% p.a. is to
be charged to the customers.
Documents that is required in its operations: The invoice details are electronically sent
to Tata Steel which shall include information like date of invoice, name of customer, due
date of payment, etc. The proof of delivery or the invoice will be kept by Tata Steel and
submitted to the Bank on demand (in case of audit) or in case of dispute / default.
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Operations process flow:
1. In the first place, Tata Steel sends a recommendation of the customers along with
credit limits. It also provides other details for both category A and category B.
2. Then, HDFC does a credit appraisal on the customers and subject to the customer
meeting the Bank’s internal credit guidelines, they confirm as to which category
the customers will fall into – Category A or Category B along with the limits.
In case of customers falling into category A , the bank does factoring of the
invoices raised by Tata Steel on the customers. The consent of the customers to
pay HDFC Bank on due date is obtained by Tata Steel prior to the commencement
of the transaction.
In case of customers falling into Category B , once the documentation is
completed, the limits shall be uploaded into the system and the transactions can
start. For the customers, HDFC Bank will open a no cheque book current account
for receipt of funds on due date.
3. Then, Tata Steel sends HDFC Bank a soft copy of the invoices with the other
details. The file containing the details is uploaded through E-Net/an e-mail,
confirming the details to be sent only from e-mail ids prior to operationalising the
deal.
4. Based on the file upload/email, HDFC Bank credits the amount of Tata Steel.
MIS confirming the transaction is sent to the concerned officials in Tata Steel
(based on the mutually agreed format).
5. The entire invoice value is credited to Tata Steel.
5. The interest on the invoice amount for the number of days of discounting is
recovered upfront by debit to Tata Steel account.
7. Tata Steel has to sign an undertaking that they hold the original invoices on the
behalf of the Bank. The invoices will be made available to the bank at request or
for any internal / RBI / statutory inspection requirements. The bank will also be
allowed to do a sample verification of the invoices once a quarter at its discretion.
8. In case of material rejection / goods not received by the end customers, the
transaction would be reserved and the amount would be debited to Tata Steel’s
account, to the extent of the rejected amount.
46
9. On the due date, HDFC Bank will receive the payment by debiting the customer’s
account.
10. In case the customer’s account does not have sufficient funds on the due date, the
entire overdue amount will attract overdue penal interest @ 4% p.a. This interest
is to be borne by the customer.
RECEIVABLE PURCHASES
Tata Steel sells its receivables of the debtors which are outstanding to the bank on a
particular date. It is known as factoring of the receivables. This factoring is done on
WITHOUT RECOURSE to TISCO as regards the Principle and Overdue Interest. This
arrangement is different from OE Finance in the sense that unlike OE Finance, here the
debts are not sold off prospectively. In this the invoices which are to be factored are issued
invoices. The company sells a set of receivables to the bank and gets the discounted
amount on the date of discounting and also debits Tata Steel’s account by the amount of
interest charges. The date of discounting is the date on which the agreement is signed
between the company and the bank. When the bank pays the money to the company, the
company gives a debit authorization for the discount amount to the bank. The bank
charges an interest on discounting @ 7.5% which is borne by Tata Steel which is the same
as OE Finance. The interest shall be calculated from the date of discounting till the
Tuesday following the due date of the said invoices. Currently, Tata Steel is dealing its
RPs with HDFC Bank. HDFC Bank shall conduct a due diligence audit of the invoices to
be sold to the Bank and satisfy itself that the invoices existed on the day.
In order to ease the collection efforts from the customers on the due date, Tata Steel
collects the money from the customers and pays the same to the bank. The payment for the
RP to the bank is made on a weekly basis on very Wednesday. By every Monday, all 25
branches, from all over the country, are intimated to forward the details of the invoices
which are paid in a particular week. All invoices collected by Tata Steel from its
customers throughout the week ended Tuesday is to be paid to the bank on Wednesday.
These details are compiled at the Tata Center, Kolkata Office, Head of Marketing and 47
Sales and then the Payment is forwarded to the bank along with a debit authorization to
them. This payment is done through a High Value Cheque so that the bank can get the
credit on the same day. Interest on discounting is charged by the bank on the difference of
the number of days of Payment Date and Discounting Date. Thus,
Amount of interest = Invoice amt.* Int. Rate* No. of discounting days
The facility of Receivable Purchase is present for both the Long Product and the Flat
Product Department of Tata Steel. All the receivables from each of the department is
handled by the Finance & Accounts Department at Tata Centre.
The receivables of the following customers in the Long Product Department are treated for
receivable purchases:
HCC
GAMMON
Ramswarup
Mahanadi Coal Fields
The receivables of the following customers in the Flat Product Department are treated for
receivable purchases:
Blue Star
HMS 1
Hongo
LG Electronics
Mark Auto
Maruti Udyog
Rasandik
Toyota Motors Kirloskar
The operating system for Tata Steel is SAP wherein all the invoice transactions along
with credit sales taking place are recorded. Each customer has a unique customer code in
SAP and any invoice raised in the name of a particular customer is recorded in SAP itself.
48
This is for both Long and Flat Products. SAP contains a list of all the invoices of each of
the customers as on the said date along with the receipt of money from the customer on a
regular basis. This report is downloaded from SAP in an excel format. This is known as a
master dump of all RPs in the different branches. This dump is essentially an invoice- wise
list. The master dump is sorted branch allocation-wise and separate excel file is prepared
for each branch. These individual files are then sub-totaled due date wise and sent to the
respective branches so that the branches can pass the entry for money receipt.
The Master Dump looks like the following: CUST. NAME
BRANCH DOC. NO.
INV. DATE NET
DUE DATE
INV. AMT.
INV. NO.
DISC. DATE
PAYMENTDATE
INT. DAYS
INT. AMT.
The first 7 columns are downloaded from SAP into excel. This is done for both flat
product and long product customers. Thereafter, a final master list is prepared by pasting
all individual customer invoices into a single file. This is the final list for sale. The
payment date is the date when the payment is made to the bank. Interest days (Payment
date – Discounting Date) are the number of days for which interest is to be charged by the
bank on Tata Steel.
Every week all the branches are intimated to send the receipts for the week to the Tata
Centre, Kolkata. For this the Finance Managers from all the branches are suggested a
colour in excel which shall relate to payment received in a particular week. The Finance
Managers fill up the colour in the appropriate invoice row and the same is transferred to
bank vendor account. After getting all the payment details, all the files are consolidated
and sub-totaled branch allocation-wise and advice for payment is made from Tata Centre.
This amount should exactly with the bank vendor in SAP which acts as a check whether
all payments have been transferred to the bank vendor.
49
LETTER OF CREDIT (L/C) AND BILL DISCOUNTING
L/C is a document issued by a bank that guarantees the payment, for a specified time
period, of a customer's drafts up to a stated amount. It is a commercial instrument through
which a bank or other financial institution instructs a correspondent institution to advance
a specified sum of money to the bearer which can be an individual or a company. The
document is called a circular letter of credit when it is not addressed to any particular
correspondent. Letter of Credit is always raised for a particular amount. The institution
drawing a L/C from a bank shall do it for a particular amount. Thus, this L/C can then be
used maximum till that specified amount and cannot exceed it. It is used as an instrument
for payment by most of the companies nowadays. Those who issue such letters are usually
so well known that any bank will honor the letter upon proper identification. L/C is of two
types: inland payment and foreign payments. It is largely used in case of international
trade. It is considered to be one of the most secured means of obtaining prompt payment
for the sale of goods.
In Tata Steel, most of the payments from customers, in the Ferro Alloys and Manganese
Division (FAMD), are received with the help of L/C. It is a kind of credit payment made
to the company which is secured in nature. The entire procedure of operating through a
L/C shall be explained with an example. One of the customers in the FAMD department is
M/S Jindal Stainless Ltd. We take a scenario where Tata Steel has raised 7 invoices in the
name of Jindals and payment is to be made through L/C. One L/C can have several
invoices but one invoice corresponds to only on L/C. Tata Steel charges a certain amount
of interest of the customer, say 8.5% to 10%, because the payment is a kind of delayed
payment. Issuance of L/C and the instructions that are made for payment by the customer
are as follows:
Jindals shall approach its bank, also known as the opening bank, for the issuance
of a letter of credit. This L/C value can be greater than or equal to the value of the
sum of invoices raised by Tata Steel. Assume that the opening bank for Jindals is
Canara Bank.
50
Every L/C has separate specifications such as the name of the beneficiary,
advising bank, negotiating bank, L/C number, date and amount, Analysis Test
Certificate. In this case, the name of the beneficiary is Tata Steel. The advising
bank is Tata Steel’s bank, to whom the opening bank shall make the payment. Here
the advising bank for Tata Steel is HSBC Bank. The negotiating bank as mentioned
in the L/C is any bank in Kolkata. Every L/C has a period of validity after which it
becomes expires. At the end of such a period the opening bank shall have to make
the payment to the beneficiary. A part of the validity days of L/C is free of interest
to the opening party and the remaining is charged a fixed interest. Other additional
conditions that need to be mentioned in the L/C are whether partial shipment and
transshipment is permitted or not, the latest date of dispatch of goods to the Jindals
and the date of negotiation. Opening bank charges shall be charged to the opener’s
bank account and the beneficiary bank charges shall be charged to the account of
the beneficiary. The L/C shall be payable and reimbursable at Canara Bank.
After the L/C has been made it is sent to Tata Steel along with the entire invoice
and other required documents.
At the end of the credit period of the letter of credit, the opening bank shall have
to issue a payment in the name of the beneficiary.
When Tata Steel accepts to receive the payment of its bills (several invoices make up a
bill), it sells it off to its bank i.e. the opening bank, HSBC. For such a transaction HSBC
charges Tata Steel certain interest. This interest is charged for a duration from the date of
drawing of invoices or bill to the date of expiry of the L/C. According to the arrangement
with Tata Steel in the FAMD department, the company shall not bear the overdue charges
in case of late receipt of payment from the customer’s bank. Thus, HSBC would transfer
this burden on the issuing bank by charging a certain interest for late payment.
Prior to HSBC, Tata Steel used to discount its bills with State Bank of India based on its
competitive rates. This was started in October 2004 with a few customers. The problem
with SBI was that the MIS system was not up to the mark and it was becoming difficult 51
to track the documents. Thus, Tata Steel was in the need of another bank which could be
competitive enough and then in late December 2004, HSBC matched their rates with that
of SBI. It was then decided that Tata Steel would discount its bills with HSBC from 1st
January, 2005 onwards. According to the agreement, Tata Steel would be discounting only
commercial invoices having 30 days of interest free period.
Problem of Interest burden on Tata Steel from HSBC in the FAMD Department
Tata Steel sells of its L/C to HSBC Bank. Payment for the L/C from the customers shall be
received at the end of the validity of the same. Thus, this leads to a blockage of liquidity
for which HSBC charges an interest on Tata Steel. At the end of the period, in case of late
receipt of payment, Tata Steel shall not bear the overdue interest charges. The crux of the
problem lies in the fact that HSBC is claiming the all the parties are failing to pay on time.
The payment is being received much later than the due date. The market interest rate for
factoring through L/C is found to be 6.5%. However, HSBC is charging 7.25% to Tata
Steel because of the claim. This increases the interest burden on Tata Steel since it has to
pay extra interest charges, when the company is not clear with the fact that whether
actually the parties are paying late or not. In case of late receipt of payment by the opening
bank, HSBC would charge an interest of 15% p.a. on a daily basis to the customer. On an
overall basis, HSBC is not losing out but Tata Steel is. Thus, the objective is to analyze the
scenario and search for the hidden facts.
For this purpose, the primary data, for January 2005 onwards, is collected from HSBC
Bank. This data is in an excel format which consists of the following columns
chronologically: HSBC Reference number for each bill, L/C number and date, issuing
bank or the customer’s bank, Name of the Applicant or the customer, invoice number
under each L/C, L/C amount, Bill amount, L/C amount which remains outstanding (L/C
amount – Bill amount), rate of interest charged on the bill to the customer, the due date of
payment for the L/C, the date of discounting of the bills with HSBC, date when the
Cheque is issued by the customer’s bank at the end of the due date, and the date when the
Cheque is received by HSBC. Prior to the analysis, according to HSBC there is a huge 52
difference in the number of days between the Cheques issuing date and the Cheque
receipt date.
The excel sheet is a consolidated one for all the parties of Tata Steel. But the analysis has
been done only on the prime customers of the FAMD department i.e. Rathi Ispat Ltd.,
Jindal Stainless Ltd., Shah Alloys, Stainless India Ltd. Above 90% of the sales come from
these customers.
What was done?
For each of the party, the difference in the days of receipt of Cheque by HSBC and issue
date of Cheque is calculated. This gives the delays in receipt of Cheque. This should be
minimum but according to HSBC’s claim it is very high. According to the calculations, for
only 11% of the cases for Rathi Ispat the Cheque was received within two days of its
issuance in 2005, for Shah Alloys it was for only 4% of the cases, none in case of Jindal
and only for 10% of the cases for Stainless India. These figures are very low for a
company. For about 33% of the cases for the Rathis’ payment was received after 9 days
which is an unfavorable figure. This is 60% for Shah Alloys, 25% for Jindals and 20% for
Stainless India. On an overall basis, for around 40% of the cases the payment is being
received 9 and more days late. (Refer Exhibit 3 (i), (ii), (iii) and (iv)). These figures make
the entire scenario non-competitive.
Because of the above facts, HSBC claims the Tata Steel would not be charged an interest
rate of 6.5%, instead it would be charged @ 7.25% on the bill for the number of days
discounted. Thus, amount of interest = Bill Amount * rate of interest * Discounting no. of
days. Thus, because of the fault of the customers Tata Steel has to bear excess burden of
interest expenses for every bill that is discounted with HSBC. According to the
calculations done in this respect, the savings that could be done for each party due to the
difference in interest rates is as follows:
Rathi Ispat – Rs. 321041.0405
Shah Alloys – Rs. 248139.0777
Jindal Stainless – Rs. 161362.7016
53
Stainless India – Rs. 40788.32008 Thus, Tata Steel can save a big amount per customer
if the management of the company can effectively negotiate with the customers to ensure
prompt payment of the bill on expiry. On an aggregate, inclusive of Tata Steel’s 4 prime
customers, the company can
save an amount of Rs. 771331.13999 only in a short duration of three months for 2005
onwards. (Refer Exhibit 3(v)). Thus, the company needs a modification in the terms of
business with its customers. This shall great implications in the years to come. The
following are the suggestions which could prove beneficial for the company:
When the payment is received by the bank, it is recorded on that date.
However, no direct intimation is received by Tata Steel regarding it from the
customer’s bank. Thus, there can be chances of wrong information being
deliberately imparted and entered by the bank. Thus, in order to avoid any
kind of such situations from happening or that could happen, Tata Steel
should make an arrangement where it would directly receive a copy of
payment made by the customer’s bank for documentation.
Tata Steel should make all sales on the condition that the customer’s bank
would be making the payment by a post dated Cheque for 10 days. When the
Cheque is issued 10 days earlier a copy of it should also be directly send to
Tata Steel for records. If such a step is taken then it would benefit both the
company and the customer. Tata Steel would be able to cut down on its
interest expenses whereas the customer’ bank will save on the payment of
interest @ 15% to the beneficiaries bank. This would in turn lower down the
interest burden on the customer directly.
While negotiating with the customer, Tata Steel can specify that the opening
bank of the customer should have an electronic mode of transmission of
payment to HSBC. If this is done then the entire delay in the receipt of
payment due to postal reasons can be controlled. As observed, most of the
opening banks are nationalized bank which are likely to be less electronically
efficient as compared to the foreign banks that are nowadays entertaining
discounting of bills. 9 Refer Exhibit 3(v)
54
Since the opening bank should ensure that the payment is received on time
by HSBC, HSBC should claim to the opening bank to explain the reasons for
the delay. As it has become a regular happening, the opening bank should
take care of the same by giving all the details to HSBC.
OVERDRAFT MANAGEMENT
Tata Steel carries out its financing activities through various banks. Two of its main banks
that constitute more than 90% of the operational activities are State Bank of India and the
Central Bank of India. Since years, Tata Steel was inefficient in managing its funds with
the banks there were large balances of overdraft with them. This created a lot of burden
upon the company. But this was realized soon and the overdraft was brought into control
by the managers of the company. Money, which is received from Jamshedpur, is put into
the current of with the banks on a daily basis from which payments shall be made.
However, it is made sure that there is no overdraft limit being reached by the banks. Thus,
according to the bank statement of State Bank of India we can make the following table.
From the table it is clear that for four months there is no overdraft balance on any day of
the month at the end of the day, whereas November has debit balance for just one day of
the month followed the other months.
Overdraft days for different months in State Bank of India10
MONTH NO. OF TIMES AMOUNT (IN RS.)Sept.'04 0 0 Oct. '04 0 0 Nov. '04 1 28937061.9
7 Dec. '04 0 0 Jan. '05 0 0 Feb. '05 0 0 Mar. '05 2 23065575.9
5 Apr. '05
3 46728341.5
10 Bank Statement of State Bank of India 55
OVERDRAFT SCENARIO ON MONTHLY BASIS3.5 3 32.5 2 21.5 1
NO.1OFD 0.5 0 0 0 0 0
0A Y
S Sept.'04Oct. '04Nov. '04Dec. '04Jan. '05Feb. '05Mar. '05Apr. '05
MONTHS
56
REDUCTION OF DAYS SALES OUTSTANDING FOR THE FLAT PRODUCTS
The Flat Product Department has both cash and credit sales. Its customers largely cover
several companies from the following industries:
Construction Sector
Automobile Sector
Auto Ancillary Sector
White Goods Appliance Sector
General Engineering
The credit limits, various credit terms and amount of credit given to each of the above
sector separately depend on the market scenario of the respective sector. Thus, in order to
decide how much exposure Tata Steel should take in respect of these sectors we need to
analyze each of the sectors separately and exhaustively. This is followed by a SWOT
analysis of each one of them.
CONSTRUCTION SECTOR
Construction Sector is experiencing a boom in the Indian economy. It is showing a growth
rate of 7% since 2002 onwards. Prior to this also it registered a very high growth rate upto
10% in 1997. The growth in this sector shows a very smooth upward trend. On the basis of
this trend, the construction sector would grow at a rate of 8% till 2010, approximately.11
11 www.ibef.org 57
GROWTH OF CONSTRUCTION SECTOR
1412 10 8 6 4 2 01 99 0
1991199219
YEARS
As predicted by Rupen Patel, managing director of the Rs 750-crore Patel Engineering, it 9 3
1 9is expected to clock a turnover of over Rs 2,000 crores in civil engineering and
9 41
infrastructural projects in the next three years from 2005. Today, in 2005, we find the 9 9 5
1infrastructural activities are being undertaken in huge scale all over the country. This is
9 9 61
mainly due to the support from the Government.12 Building up of over-bridges, railway 9 9 7
tracks, etc. have increased a lot. Examples for some of such activities since 2005 onwards 1 99 8
are as follows13 : 1 99 92 00 0
Nagarjuna Constructions has bagged an Rs 450 crores order for construction of a 2 00 1
4-lane highway on NH-58 from National Highways Authority of India (NHAI). 2 00 2
Mumbai-based Patel Engineering bagged orders for two irrigation projects in 2 0
0 3Andhra Pradesh worth Rs 878 crores.
Madhucon Projects has also received orders worth over Rs 1,500 crores for
irrigation projects in Andhra Pradesh.
Domestic majors like L&T, Hindustan Construction, Bharat Heavy Electrical,
Gammon India and Patel Engineering, meanwhile, are switching their focus back
to the Indian market.
12 www.google.com 13
www.ibef.org 58
Projects in industries such as surface transport (roads, bridges, railways), energy
and power (nuclear, hydel and thermal), housing (urban and rural), airports,
shipping, irrigation and flood control worth over Rs 115 lakh crores are being
initiated.
Along with this, the Foreign Institutional Investors sees India as an engineering and
construction hub. The value of FII holding is increasing at the cost of domestic holding.
The sharp rise in overseas interest for engineering and construction firms comes on the
back of strong order inflows, which have shot up in recent months. At least 10 foreign
construction majors have set up shops in the last 6 months. As a result of the surge in order
inflows, FII exposure in the biggest industry player Larsen & Turbo, which exited its
cement business to re-emerge as a specialized engineering and construction company, has
seen a sharp rise from 10% to 17.1% during the past year. With the removal of the
restrictions on the FDI inflows by the Government, we find construction projects being
undertaken on a very large scale.
The SWOT of this sector is as follows:
Strength:
Large potential for expansion in the sector supported by huge investments
encouragement by the government.
Housing industry is being considered as a health barometer of the economy.
Increasing volume of infrastructural activities being undertaking in India as well
as globally.
Increase in the per capita income of the middle-class families which leads to a
boom in the housing sector.
The economy is showing a high overall growth rate.
Weakness:
Sale of undeveloped plot by the foreign investors is not allowed.
Reduction in the minimum land area requirement in the residential sector from
100 acres to 25 acres.
59
Minimum area for commercial development pegged at 50000 sq. meters.
Opportunity:
Liberalization of FDI in the construction sector upto 100%.
Loan for infrastructural activities available at a cheaper rate.
Raw-material cost is expected to decline over the next 2 years.
Outsourcing being introduced in the sector at a larger scale.
Threat:
Threat of competition laying its adverse impacts on the entire industry.
Overall the construction sector can be rated as high in terms of opportunity and low in
terms of risk. On the basis of the current outstanding of the different sectors the
construction sector is having a total exposure of 2.61%. This means that out of the total
credit, the credit to this sector is very low. The construction sector falls in the third
quadrant of the growth-exposure matrix. Because of high opportunities coming up with,
new infrastructural activities, Tata Steel can easily increase its exposure to this sector.
AUTOMOBILE SECTOR
With a market size of approximately Rs 540 billion and consistent growth figures of nearly
8% per annum, India's automobile sector consists of the passenger cars and utility
vehicles, commercial vehicle, two wheelers and tractors segment. In the passenger car
segment the big players are Maruti Udyog Ltd., Tata Motors Ltd. and Hyundai Motor
India. In the motorcycle segment, we have Hero Honda Motors Ltd. and Bajaj Auto Ltd.
India's automobile sales expanded by 15.9% in the year ended March 31, 2005 to
7,896,475 vehicles as against 6,810,537 vehicles sold in the fiscal year 2003-04. This
includes sales of passenger cars, two-wheelers and commercial vehicles, including utility
vehicles and multi purpose vehicles. Automobile exports, meanwhile, jumped 31.2% in 60
the year ended March 2005 to 629,887 units with passenger cars and motorcycles
contributing to the bulk of exports.14
INFAC is forecasting a 12-15% annual growth in the passenger car sales, 6-8% in
commercial vehicles and around 10% in two wheelers.
Almost all the major automobile manufacturers such as GM, Ford, DaimlerChrysler,
Honda, Toyota, Hyundai, already have made significant investments in India. In the next
2-3 years from 2005, the passenger vehicle industry is expected to see investments of more
than Rs 30 billion; two wheeler industry is expected to attract investment amounting to Rs
10 billion.
Annual growth was 16.0 per cent in April-December, 2004; the growth rate in 2003-04 was 15.1
percent. The automobile industry grew at a compound annual growth rate (CAGR) of 22 per cent
between 1992 and 1997. With investment exceeding Rs. 50,000 crores, the turnover of the
automobile industry exceeded Rs. 59,518 crores in 2002-03. Including turnover of the auto-
component sector, the automotive industry’s turnover, which was above Rs. 84,000 crores in
2002-03, is estimated to have exceeded Rs.1, 00,000 crores in 2003-04.15
Current scenario in the auto sector16
Car market leader Maruti has lined up around Rs 6,000 crores for its new plant
and engine facility.
Hyundai too has planned a $450m second plant with component makers chipping
in another $150m.
Tata Motors has lined up Rs 5,000 crores in investments up to ‘07.
Hero Honda and TVS are planning Greenfield facilities (the combined investment
of the two companies may be around Rs 600 crores)
Honda Motorcycle and Scooters India, which spent Rs 150 crores each in ‘03-04
and ‘04-05, has pledged another Rs 100 crores in ‘05-06. 14 www.ibef.org 15
www.steel.nic.in 16
www.google.com 61
Premium carmaker DaimlerChrysler’s spend in the three years is pegged at
around Rs 41 crores.
In the next 2-3 years, the passenger vehicle industry is expected to see
investments of more than Rs 30 billion; two wheeler industry is expected to attract
investment amounting to Rs 10 billion
Between FY04 and FY07, autoville has lined up around Rs 25,000 crores in
investments, including money being pumped in by the components sector as OEMs
ramp up capacity.
The entire auto sector is expected to grow by 15% till 2010. The auto sector combined
with the auto ancillary sector can be graded as high in terms of opportunity and low in
terms of threat. At present Tata Steel is having a total exposure of 30.63% to the auto
sector which has a high growth. Hence it just needs to maintain it. The Auto sector lies in
the first quadrant in the growth-exposure matrix.
AUTO ANCILLARY SECTOR
A growth of 30% in automobile sales in ‘04-05 is encouraging ancillary majors to invest
heavily in capacity expansions. It is spending around Rs 1,600 crores in creating new
capacities over the next 2-3 years. The larger ancillary companies have benefited from
strong demand for commercial vehicles, passenger cars and two-wheelers, auto
components companies have been able to protect their profitability despite rising metal
prices, mainly of steel.
The growth in the Indian auto ancillary sector was around 16 percent by the end of the
2004-05 fiscal, which is lower than the growth of 22-24% recorded in 2003-04. India has
gradually become a sourcing hub for auto companies worldwide. The growth of auto
component exports from India has spurred due to availability of skilled, low cost labour
and the high quality consciousness.17
Among the companies outsourcing from India are General Motors, Ford, Daimler
Chrysler, Hyundai, Fiat, Toyota, Delphi, Navistar, Visteon, Cummins and Caterpillar. A 17 www.ibef.org
62
number of Indian companies with global ambitions are gradually moving towards
creating a niche in the world market: Bharat Forge Ltd. and Tata Auto Components
System (TACO). Over the past two years, 7 Indian component manufacturers have won
the coveted Deming Prize, one of the highest awards on TQM (Total Quality
Management) in the world.
The global auto component industry was expected to touch $1.9 trillion by 2015, of which
around 40% ($700 billion) was potentially expected to be sourced from low cost countries
like India. Exports of auto components are expected to increase by 30-35% which account
for 15% of the total output. With 21.5 percent CAGR, the figure is expected to touch $2.6
billion by 2006.18
The flat product department of Tata Steel is having a total exposure of 52.00% in the auto
ancillary sector which is quite high. Along with this, the sector is showing a low growth
rate. In the growth-exposure matrix the auto ancillary sector lies in the forth quadrant. So
the company needs to reduce its exposure to this sector by some extent. This is necessary
to ensure that the company would not suffer in case of adverse situations.
The SWOT analysis of the auto and the auto ancillary sector is as follows:
Strength:
Diversification in the variety of vehicles.
Increase in the standard of living of the people leading to rising demand for new
vehicles.
Reduction in the duty rates in Budget 05-06.
Export friendly norms provoking manufacturers to expand their business with
better quality.
Good rate of R&D activities being undertaken.
Opportunity:
Falling steel prices.
18 www.ibef.org 63
Foreign player are coming.
Innovation is taking place at a high speed due to improving technology, new
models of vehicles being introduced.
Expansion through setting up of factories globally.
Cheap and easy availability of car loans to the housing sector.
FTA effect in the auto-ancillary sector, boosting the same.
Threat:
Large inventory of vehicles in certain segments.
Declining margins with tremendous pressure due to high input cost and increased
competition in the industry.
Rising oil prices, forcing the customers to adopt other means.
WHITE GOODS APPLIANCES SECTOR
The White Goods Appliance includes the following: Washing machines, Refrigerators, Air
Conditioners, Cookers, Washer Dryers, Dishwashers, Electrical Lamps & Tubes, Storage
Batteries, Dry Cells, Lead Acid Battery, etc. The important players in this sector are:
Electrolux, National, Daewoo, Whirlpool, Godrej, BPL, Videocon, Samsung, LG, Onida
and Maharaja.
White goods industry has been growing at an average rate of 10-12% every year for the
last five years. The Industry is focusing smaller goods in the range of 3 to 4 kg capacity as
compared to larger machines as there are more and more nuclear families rather than joint
families. The present its capacity is adequate to cater to the demands of domestic
requirements as well as exports.
The industry is de-licensed and also eligible for automatic approval for Foreign Direct
Investment. There is greater consumer awareness about the quality and safety of these
goods, driving the manufacturers to adhere to the quality standards. The state government
will encourage producers of refrigerators, washing machines, kitchen appliances, TVs,
furniture and other domestic goods.
64
Refrigerator Industry19
The refrigerator industry has become highly competitive as a number of brands
have entered the market and the consumer has a wide choice.
There is a shift in Refrigerator Market in terms of Capacity. Till about 2000-01,
165 Litres had a larger share and now units of capacity 185-300 Litres are having
increasing market share.
Refrigerators form the largest segment of this industry and is estimated at about 3
million appliances, followed by washing machines at about a million appliances
and air conditioners, which are about .6 million appliances.
The Refrigerator industry is growing at a rate of 10 to 12 %, Washing machines
which was growing very fast at about 20 to 25% has slowed down in the last two
years to almost 4 to 5%, and air conditioners are still growing at 20 to 25%.
Air Condition Industry
Indian air conditioning industry is growing rapidly with a growth rate of 20% every year.
However, the penetration of this category is very low. The industry is almost divided
50:50 into room air conditioning and package air conditioning.
Example:
Whirlpool
Whirlpool is a mass player with 27% market share in Refrigerators and a 20%
market share in washing machines. They are leaders in refrigerators.
Due to their global cost competitiveness, they do not face threats from the
Chinese products in India and also have a high export market.
Exports are going to grow at an average of 70% to 80%.
They are the key suppliers in Asia and also countries in Latin America, Europe
and the US.
Electrolux is its global competitor 19 www.google.com
65
The SWOT analysis of the White Goods Industry can be enumerated as follows:
Strength:
Growth in the service sector.
Quality products being demanded by the public forcing the companies to
continuously improve their products.
Good rate of R&D activities being undertaken.
Increasing per-capita income.
Scope for continuous replacement of its goods in short spans of time.
Opportunity:
Easy availability and reducing steel prices due to increasing competition.
Outsourcing is providing new opportunities for expansion.
Threat:
High rate of precision required, which might lead to high rejection rate.
On the basis of the SWOT analysis, we can grade the white goods sector as high in terms
of threat and opportunity. It is showing a very high growth rate of 16.82% in the last
financial year. From the following graph, we can notice the trend in growth of the white
goods sector.
GROWTH OF WHITE GOODS SECTOR
60
5
0
4
0
3
0I 20 10 0
-10 1996199719981999200020012002200320042005YEAR
-20
66
However, the amount of business of Tata Steel with companies in this sector is to the
extent of only 4.04%. This corresponds to a very small portion of the total outstanding
inclusive of all sectors. In the growth-exposure matrix, the white goods sector lies in the
second quadrant.
GENERAL ENGINEERING SECTOR
The general engineering sector consists of the various industries. A brief on such
industries is mentioned as follows:
Heavy Industry: Heavy Engineering Industry is one of the largest segments of Industrial
production. It occupies a whole range of industries such as Heavy Electricity Machinery.
Turbines, Generators, Transformers, Switchgears, Textile Machinery etc. The Index of
Industrial Production figures of 8 of the 16 major industry groups show substantial growth
with the rates ranging from 6% to 28%. Trends across major sectors show that growth in
the two lead sectors-capital goods and consumer non-durable goods-have decelerated but
still remain at the double-digit levels which have been compensated by the strong recovery
in the intermediate goods segment.
Machine Tools Industry: It is the Backbone of the entire industrial engineering sector.
During the last four decades, the machine tool industry in India has established a sound
base and there are around 125 machine tool manufactures in the organized sector as also
around 300 units in the small ancillary sector.
Mining Equipments: At present there are 32 manufactures in the organized sector both in
public and private sector for underground and surface mining equipment of various types.
Out of these 17 units manufacture underground mining equipment. The production for
2000-2001 & 2001-2002 was Rs. 149.52 crores and Rs. 238.86 crores respectively.
Heavy Electrical Industry: Among the Third World countries, India is major exporter of
heavy and light engineering goods. It also makes construction machinery, equipment for
irrigation projects, diesel engines, tractors, and transport vehicles, cotton textile and sugar
mill machinery. The heavy electrical industry meets the entire domestic demand. BHEL
is the largest engineering and manufacturing enterprise in India in the energy 67
related/infrastructure sector today. It has been earning profits continually since 1971-72
and paying dividends since 1976-77. BHEL caters to the core sectors of the economy i.e.
Power generation & transmission, industry transportation, telecommunication,
renewable energy etc.
Petroleum Industry: The petroleum industry in India is undergoing a major change. The
industry has been thrown open for private sector in all the major areas of exploration,
production, refining and marketing, resulting in increased demand for the oil field and
related equipment. The users are ONGC, Oil India Ltd.
Sugar Industry: Domestic manufactures of sugar machinery occupy a predominant
position in the global scenario. They are capable of manufacturing sugar plants of latest
design for a capacity upto 10,000 TCD. There are presently 27 units in the organized
sector for the manufacture of complete sugar plants and components with a current level of
production value of Rs. 136.87 crores against installed capacity of Rs. 200 crores.
Textile Industry: The industry has developed over the last five decades and is one of the
oldest industries catering to the needs of textile sector. The Textile Machinery Industry are
endeavoring to upgrade the production of sophisticated machines so as to cater to the
needs of garments and weaving sector. Indian Textile Machinery Manufactures are
manufacturing textile machinery. After the patent regime, Indian Textile Industry is over-
heated.
The total exposure given by Tata Steel in terms of outstanding of credit sales in the flat
product department to the general engineering sector is 10.72%. This figure is very
competitive and should be maintained.
The general engineering sector had shown a decent growth over the years. However, it had
a negative growth in 2005 at -5.05%. According to the actual figures, the sector lies
outside the growth – exposure matrix, towards the third quadrant. Instead of the actual, if
the growth value could be replaced by the trend value, then the sector would lie in the
third quadrant. We could easily substitute the actual figure by the trend figure because 68
none of the past 10 years data show a negative value. The reason behind the negative
growth would not be sufficient to carry it forward to show a negative trend.
DATASECTOR CURRENT
GROWTH
% OF TOTAL EXPOSURE
CONSTRUCTION
6.89 2.61
AUTOMOBILE15.9 30.63
AUTO ANCILLARY
0.63 52.00
WHITE GOODS16.82 4.04 GEN. ENG.
-5.05 (A), 4.47 (T) 10.72
MATRIX SHOWING SECTORS WITH RESPECT TO GROWTH & EXPOSURE
WGA
AUTO
CONST.
C
UR GE (T)
ENTGR LO AUTO
ANC.
O T H
W W LOW
LEVEL OF EXPOSURE
GE (A)
69
HIGH
Outstanding payment and overdue payment:
When sales are made on credit, the entire amount of sales is outstanding as on the date of
sales. The payment for the same needs to be made when the credit limit expires. However,
in case, payment is still not received with the expiry of the credit limit, the amount
becomes overdue in the name of the customer. Usually, we find that credit sales are
negotiated by keeping in mind charging of overdue interest on the customer.
Out of the total outstanding, 6.81% remains as overdue i.e. payment is not received on
time. Sector-wise, the construction sector shows a low overdue percentage whereas the
general engineering sector shows as high as 11.68%. The remaining sectors have an
overdue of 6% approximately. Thus, Tata Steel needs to control its overdue for all sectors.
Overdue vs. OutstandingSector % overdue (in terms
of outstanding) Construction
3.98
Automobile
6.03
Auto Ancillary
6.47
White Goods
6.16
Gen. Engg.
11.68
Total 6.81
70
PREDICTIONS FOR 2010
CONSTRUCTION SECTOR
The cycle of fluctuations in case of the construction sector consists of three years
approximately. This means that in every three years the sector experiences boom and
recession respectively. Thus, according to expectation the construction sector will grow at
7.5% in 2010. At present, Tata Steel is giving very low exposure in terms of outstanding
where the percent of overdue is also as low as 3.98%. Hence, it can be suggested that Tata
Steel can increase its exposure in this sector. We can place this sector in the low risk and
high market attractiveness quadrant in the matrix of 2010.
AUTO SECTOR
The cycle of fluctuations in case of the auto sector consists of three years approximately.
This means that in every three years the sector experiences boom and recession
respectively. It is expected that the automobile sector would grow at rate of around 12% to
15% in 2010. Around 30% of the sales go to this sector and the overdue percentage is also
as low as 6%. Tata Steel can easily maintain the current scenario. We can place this sector
in the low risk and high market attractiveness quadrant in the matrix of 2010.
AUTO ANCILLARY SECTOR
The cycle of fluctuations in case of the auto ancillary sector consists of two years
approximately. This means that in every two years the sector experiences boom and
recession respectively. The expected growth in this sector in 2010 shall be less than that of
the auto sector. The exposure given to it is extremely very high. Thus, it would lie in the
high risk and low market attractive region in the matrix of 2010.
71
WHITE GOODS SECTOR
The cycle of fluctuations in case of the white goods sector consists of three years
approximately. This means that in every three years the sector experiences boom and
recession respectively. In this sector, by 2010 the growth rate would be more than 10%
approximately. As observed from the data of 2005, white goods sector is given low
exposure from the total outstanding and the overdue percentage is 6.16%. Thus, the sector
would lie in the high risk and high market attractiveness quadrant in the matrix of 2010.
GENERAL ENGINEERING
The cycle of fluctuations in case of the general engineering sector consists of two years
approximately. This means that in every two years the sector experiences boom and
recession respectively. They shall have a low growth rate by 2010. At present, the
exposure given to this sector is only 10% of total outstanding along with a very high level
of overdue i.e. in 11.68% times. Thus, the sector can be said to lie in the high risk and low
market attractiveness quadrant in the matrix.
2010 SCENARIO
AUTO ANCILLARYWHITE GOOD APPL.
GENERAL ENGG. RIS K
CONSTRUCTION
AUTO
L O
W LOW
MARKET ATTRACTIVENESS
72 HIGH
STEEL INDUSTRY – WORLD
GROWTH OF STEEL CONS. IN THE WORLD
12.000
10.00
0
8.000
6.000
I4.000 2.000 0.000
-2.000 199619971998199920002001200220032004
YEARS
The past data on the consumption of steel in the world is showing an increasing trend. On the
basis of the absolute values, the growth in the consumption is calculated i.e. Growth =
(Current year – previous year) / previous year *100. The graph showing the growth figures are
very fluctuative, rather increasing, in nature.
In US, the demand is led by the booming housing industry. The auto industry is
also showing signs of recovery as auto sales hit their strongest levels for the year
in July even as US posted a 2.4% GDP growth.
In India, CIS and other Asian countries the demand is led by investment activities
in infrastructure.
China is consuming steel like never before for its infrastructure with investments
such as Three Gorges project on Yangtze as well as part of its build up to the
Beijing Olympics in 2008 and the Shanghai Expo in 2010.
The white goods resurgence in Europe leads to a boom in the steel sector.
Iraq reconstruction work is expected to fuel further demand for steel over the next
three years.
73
STEEL INDUSTRY – CHINA
GROWTH OF STEEL IN CHINA
30.000
25.00
0
20.00
0I 15.000 10.000 5.000 0.000
199619971998199920002001200220032004
EARS
The past data on the consumption of steel in China is showing an increasing trend. On the basis of
the absolute values, the growth in the consumption is calculated i.e. Growth = (Current year – previous
year) / previous year *100. The graph showing the growth figures are very fluctuative, rather increasing, in nature.
There are a few dips in the growth rates.
China’s red hot steel sector is expected to produce a record 350 mt of steel this
year
According to the China Iron and Steel Association (CISA), China's steel output
amounted to 220 mt in 2003 and, this year; it is projected to climb to 350 mt.
Chinese steel units produced 82.53 mt of rolled steel in the first quarter this year,
up 22.39 per cent year on year and consumed 83.31 mt during the same period, a
net rise of 11.01 per cent
According to the Xinhua News Agency, the CISA expects the rolled steel price to
drop in the light of the present supply-demand situation.
According to CISA, in the first three months of 2005, China turned out 77.79 mt
of crude steel, a jump of 25.2 per cent year on year, and 72.57 mt of pig iron, an
increase of 27.32 per cent year on year.
74
China's rolled steel output ranked the first in the world over the past nine years,
making up 14 per cent of the world's total steel output.
The demand for rolled steel has risen by an annual average of 20 per cent in the
past five years since 2000 as more and more people in China buy cars and
refrigerators and the country builds in preparation for the Beijing 2008 Olympics
Games.
STEEL INDUSTRY – INDIA
In the Union Budget 2005-06, customs duty on alloy steel has been further brought down
to 10%. Currently the customs duty on prime non-alloy steel and prime alloy steel is 5%
and 10% respectively. The excise duty on all iron and steel items, which had been falling,
has increased from 12% to 16% in the Union Budget 2005-06. The rationalization
of the excise duty to a single central value added tax will have no impact on the steel
industry. The excise duty on scrap will go up from the current 8% to 16%. The customs
duty for steel products will continue at the present rates.
The move to tax the steel companies at factory prices rather than at the stockyards will
have a positive impact on companies like SAIL and TISCO, which have very long lead
distances.
The interim ruling of the World Trade Organization (WTO) declaring the US
government’s section 201 duty on steel imports as violative of global trade rules is likely
to have an adverse impact on India as it would increase competitiveness of rival countries.
Experts point out that the safeguard duty, which was imposed on countries such as Japan,
China, Brazil, New Zealand, South Korea and the European Union a year ago, had actually
helped India as it was excluded from the list.
If the figure of steel demand of 840 million tonne for 2005 if is to be accepted, the world
should be preparing for additional capacity creation in the industry. Even the current idle
75
capacities pressed into operation will not fully deliver the goods as the same will fall short
of the target.
The crux of the problem today lies in demand recession, but much of this demand
recession is a demand miscalculation. Most of the steel companies failed to distinguish
between a steady state demand and a pent-up demand.
Prices could go down genuinely more with an increase in the asset intensity of the
industry. Prices remain depressed forcing the producers to clear markets without covering
their variable costs. Steel companies are pressed badly at their margins. (Refer Exhibit 1
and 2).
Price per unit is so close to the average variable costs that steel producers can hardly aim
at covering their fixed costs. This explains the world wide trend by which the steel
companies are shutting down their lines, disposing off assets and hiving off related but
non-core business.
The industry did pay a lot of attention to the problem of the industry facing erosion in
shareholders' confidence.
The Ministry’s vision statement 2020 has placed a high priority to treble the steel demand
in the coming decades.
The problem of demand stagnation can be tackled by penetrating vast rural markets where
consumption of steel at present is at the lowest.
Industry Scenario
The industrial sector registered an impressive growth of 8.4 per cent in the first three
quarters of 2004-05, the highest after 1995-96, and the services sector recorded an 8.9 per
cent growth. The improvement is particularly pronounced in manufacturing, capital
goods and consumer durables. Six core industries, i.e. electricity, coal, finished steel, 76
cement, crude oil and petroleum products registered a lower average growth of 5.4 per
cent.20
STEEL SECTOR EXPANSION IN INDIA21
Steel magnate LN Mittal is expected to set up a 5 million tonnes steel plant in the
first phase which will make the domestic market more competitive.
Mittal Steel will invest Rs 250 billion to set up the plant with a total production
capacity of 10 million tonnes of steel per year. The plant is expected to generate
150,000 jobs in the state.
Several leading domestic firms have also put forward proposals that are being
reviewed by the government. Jindal Steel plans to invest Rs 110 billion, while
Essar Steel will invest Rs 50 billion to set up steel plants.
Ispat has also proposed to increase its plant capacity at Dolvi, near Mumbai from
3-5 MT over the next couple of years. It has also recently proposed to set up a 5
MT plant in Orissa, provided it gets assurance from the state for captive mining
leases.
Ruias plans Rs 2k-cr one mt mini steel plant as part of its backward integration
plan reported a leading business daily.
20 www.ibef.org 21
The Iron and Steel Review, February 2005 issue 77
INDIA’S FINISHED STEEL CONSUMPTION
GROWTH OF STEEL IN INDIA
9.00 8.0
0
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00 199619971998199920002001200220032004
YEARS
The past data on the consumption of steel in India shows an increasing trend. On the basis of the
absolute values, the growth in the consumption is calculated i.e. Growth = (Current
year – previous year) / previous year *100. The graph showing the growth figures is very
fluctuative in nature. The previous 10 years growth figures are averaged out to give the expected
growth in the coming 5 years till 2010. The average growth was calculated as 5.68%. Thus, we
get the projections graph from this.
PROJECTIONS TILL 2010 (@5.68)
50.0
40.0 40.3 42.6 45.0
30.0 34.1 36.1 38.
1 32.3
20.0
C O 10.0N S 0.0. (
in m 2004 2005 2006 2007 2008 2009 2010
m YEARt )
78
Reasons for the projection in the growth rate
Indian scenario:
• The early recession of 1999 has come to an end and there is a boom in the steel
sector.
• Increased competition has lead to declining prices in the market, thereby
increasing the demand.
• Continuous reduction in import duty on iron and steel
• Huge investments being made in the construction sector.
• Overall economic growth of the country.
Boom in the Global Economy:
• Olympics infrastructure with investments in China
• Housing Sector in U.S.A
• White goods resurgence in Europe
• Infrastructure activities in CIS and other Asian Countries
• Reconstruction work in Iraq
WORLD NET OF CHINA
The world, excluding China, shows a good growth trend and a high actual growth rate.
ROWTH IN STEEL IN THE WORLD NET OF CHINA
1210 8 6 4 2 0-2 199519961997199819992000200120022003
YEARS -4
79
BCG MATRIX
The Boston Consulting Group (BCG), a leading management consulting firm, developed
and popularized a growth- share matrix. The market growth rate on the vertical axis
indicates the annual growth rate of the market in which the business operates. It usually
ranges from 0 percent to 20 percent. A market growth rate above 10% is considered high.
Relative market share, which is measured on the horizontal axis, refers to the various
companies’ market share relative to that of its largest competitor in the segment. It serves
as a measure of the company’s strength in that market segment. A relative market share of
0.1 means that the company’s sales volume is only 10% of the leader’s. Relative market
share is drawn in log scale, so that equal distances represent the same percentage increase.
The growth-share matrix is divided into four cells, each indicating a different type of
business. They are Question Marks, Stars, Cash cows and Dogs. These have been
explained with the countries itself in the various quadrants.
BCG MATRIX FOR THE WORLD ECONOMY
The BCG Matrix for the year 2004 is drawn on relative market share – market growth rate
axis, where we take the US economy as a benchmark economy. All other countries are
represented in terms of US market share. First of all, we are given the consumption of steel
in the global economy including India in the following table.
On the basis of the consumption data, we calculate the growth rate (compounded annual
growth rate i.e. CAGR) for each of the country. The formula for calculation is as follows:
CAGR = (((Last year’s cons. / first year’s cons.)^ (1 / No. of years)) – 1) * 100
Relative market share is calculated on the basis of the absolute market share. Absolute
market share for a country is calculated as a percentage of its consumption in 2004 with
respect to the total global consumption. Since we have taken US economy as the
benchmark economy, its relative market share is taken as 1x. For all other economies we
80
calculate the relative market share by dividing its actual market share with that of the US
market share. Thus, the relative market share of any country can either be less than or
greater than that of US economy. According to the calculations, China and European
Union have a market share that is greater than that of US, whereas, CIS, S. Korea, Japan
and India have a market share that is less than that of the US economy.
WORLD STEEL CONSUMPTION22
YEAR CHINA EU(15) CIS US S.KOREAJAPAN INDIA OTHERS TOTAL 1995 87.4 129.2 26.5 100 35.2 77.7 22.2 166.9 645.
1 1996 100.7 113 25.2 107 37.4 75.8 22.8 167.1 648.9 1997 103.3 128.5 27.7 113.4 37.9 79.9 22.9 188.3 701.8 1998 110.7 139.6 24.5 119.8 24.7 70.3 23.2 179.3 692.1 1999 122.6 137.3 28.1 116.4 33.8 68.9 25.1 175.8 707.9 2000 124.6 143.8 35.6 120 38.3 76.1 26.3 193.6 758.4 2001 153.4 139.6 38.4 106.2 38.1 73.2 27.1 194.9 770.8 2002 185.6 138.1 36.7 107.4 43.7 71.7 28.9 208.7 820.9 2003 232.4 137.5 38.5 100.5 45.8 73.4 30.3 214.4 872.7 2004
265 145.7 52 115.9 47.2 76.9 32.3 232.9 967.9 CAGR
11.7
1.2
7.0
1.5
3.0
-0.1
3.8
3.4
4.1
COUNTRY
CHINA EU(15)
CIS US S.KOREAJAPAN
INDIA OTHERS
MKT SH. FOR 2004 27.4 15.1 5.4 12.0 4.9 7.9 3.3 24.1 REL. MKT. SH.
2.3 1.3 0.4 1.0 0.4 0.7 0.3 2.0
On the basis of the above data on growth and relative market share, we draw the BCG
Matrix. Each of the countries can be categorized as stars, cash cow, dogs or ??????. Since,
we had taken US as having a market share of 1x, we get the following in terms of the
above:
China is a star, EU (15) is a cash cow and Japan, India, CIS and S.Korea are dogs. There is
no ????? country in the present scenario.
22 Market Research Reports at Tata Steel 81
BCG MATRIX
20%
STA
RS
?????
15%
CHINA
10%
CASH COW DOG
Mark 5% CIS
etG OTHERS INDIA
rowthRae 0%
10 X 5 X
EU(15) U.S
JAPAN S.KOREA
1 X
0.5 X
Relative Market Share
0.1 X
From the above matrix, we can draw the following conclusions for the various countries:
CHINA: China, being a star economy, can be said to be leaders in business and they
should also generate large amounts of cash. However, they should ensure that their growth
rate doesn’t dip down in any chance otherwise they would land up being a cash cow, by
keeping up the market share.
EU (15): EU (15) is a cash cow economy which can be said to be having high profits and
cash generation. They can have low levels of investments because of the low growth rate.
JAPAN, INDIA, CIS and S. KOREA: These countries need to be careful against each
other, being a dog in nature. They are likely to experience various turn around moves from
the other dogs, hence they should be careful about it. Since they have low growth rate as
well as a very low market share, there is a chance of them getting liquidated, so they need
to ensure constant cash flows for existence in the global economy.
82
CONCLUSION
Finally, we can say that the credit management at Tata Steel has various components to be
managed. Most of it is under control and some of it needs special care for maintaining the
amount of Working Capital. From the following graph it is clear that the Working Capital
scenario has improved a lot. The amount of credit given is also under control.
Working Capital Management
7060 58 55 57
5350 44 47 DEBTORS
43 41 38 30
37 INVENTORYNET WORKING
25
D a CAPITALy s 20 16
o f S a l e 10 0
FY'01
FY'02Years
FY'03
83
FY'04
EQUITY ANALYSIS - INTRODUCTION
There are two general schools of stock analysis: fundamental and technical.
FUNDAMENTAL ANALYSIS
Fundamental stock analysis requires, among other things, a close examination of the
financial statements for the company to determine its current financial strength, future
growth and profitability prospects, and current management skills, in order to estimate
whether the stock's price is undervalued or overvalued. A good deal of reliance is placed
on annual and quarterly earnings reports, the economic, political and competitive
environment facing the company, as well as any current news items or rumors relating to
the company's operations. Simply put, fundamental analysis concerns itself with the
"basics" of the business in assessing the worth of a stock.
Numerous ratios, derived from balance sheet and income statement data, are used in
fundamental analysis including such widely used ratios as, Working Capital Ratio, Debt-
equity Ratio, Return on Equity Ratio, Earnings per Share, etc. Fundamental analysis may
be the preferred method to use for mid to longer term investors. However, it is not suitable
for use by day traders because of the amount of research required, and the fact that trades
are entered into and exited within a very short time frame.
The massive amount of numbers in a company's financial statement can be bewildering
and intimidating to many investors. On the other hand, if you know how to read them, the
financial statements are a gold mine of information. Financial statement analysis is the
biggest part of fundamental analysis. Also known as quantitative analysis, it involves
looking at historical performance data to estimate the future performance. Followers of
quantitative analysis want as much data as they can find on revenue, expenses, assets,
liabilities, and all the other financial aspects of a company. Fundamental analysts look at
this information for insight into the performance of in the future. They don't ignore the
company's stock price; they just avoid focusing exclusively on it.
84
Some of the indicators commonly used to assess company fundamentals include: cash
flow; return on assets; conservative gearing; history of profit retention for funding future
growth; and soundness of capital management for the maximizing of shareholder earnings
and returns.
Performing fundamental analysis can be a lot of hard work. But that is, arguably, the
source of its appeal. By taking the trouble to dig into a company's financial statements and
assess its future prospects, investors can learn enough to know when the stock price is
wrong. Those investors able to spot the market's mistakes can make themselves money--a
lot of it. At the same time, buying companies based on intrinsic, long-term value protects
investors from the dangers of day-to-day market flux.
However, the fact that fundamental analysis shows that a stock is under-valued does not
guarantee that it will trade at its intrinsic value any time soon. Things are not so simple. In
reality, real share price behavior relentlessly calls into question almost every stock
holding, and even the most independent-minded investor can start doubting the merits of
fundamental analysis. There is no magic formula for figuring out intrinsic value.
FUNDAMENTAL ANAYSIS OF TATA STEEL – Valuation of Intrinsic Value of the
share of the company as on February, 2005.
For finding the intrinsic value of the equity share of Tata Steel, we incorporate future as
well in terms of projections made for the next 5 years and 6th year onwards.
We undertake the following calculations, assumptions and conclusions on the basis of the
previous 5 years financial figures:
Estimated growth of the
Indian Economy for the next
20 years is 8% and thereafter
it shall stabilize at 5%.
The growth in the operating
income of the previous 5
years is calculated for each of
the previous years. These
figures were found to be very
fluctuative in
nature, ranging from -1.89% to 30%. Thus, in order to project the income
figures for the coming years
we assume that the company
will grow at a 85
conservative estimate of 10% per annum for the next 5 years followed by 7%
in the long-run.
Next we calculate the ratio of
the various components of the
cost of sales with respect to
the operating incomes for the
previous 5 years in order to
project the cost component
for the coming years. We find
that Tata Steel has been
successful in reducing the
cost component significantly
in the last few years. But
these gains would stabilize at
some point of time. The
company is already the
world’s lowest cost steel
producer. So we propose to
assume that the cost structure
remains static at the 2004
value. The ratio of cost of
sales to the operating income
came out to be 0.6623. (Refer
Exhibit 4(i)).
The ratio of cash operating
profits before taxes to the
operating income comes out
to be 0.3377 (1-0.6623).
Thus, on the basis of the
projected operating income
for the coming years we
calculate the projected cash
operating profit before taxes
by using the formula COPBT
for a year = Operating profit
for the year * ratio of COPBT
to the operating profits.
Tata Steels intends to spend
9100 crores for next 6 years
to increase its capacity from
4.7 mT to 9.2 mT. This
means company will spend on
an average 1200 crores per
year for next 6 years till 2010.
So we assume that it uses Rs.
1200 towards asset creation.
Also during early 1990s
Steels sector went for
capacity expansion which
leads to glut situation during
late 90s. This along with
recession in world & Indian
economy ensured poor
growth of industry till 2001. It
is only in 2002 that the
industry turned around. Due
to growing demand from
China & increased
infrastructure spending in
India, Industry has good
future growth. Thus
projection using past data will
not be accurate.
We assume that for each of
the coming years the Net
Block would be the sum of
the previous years net block,
Reinvestments for the year or
the net purchases in the assets
and the constant (assumed to
be Rs. 1200) additional
investments for the year.
The rate of depreciation, for
each of the previous 5 years,
is determined on the basis of
the following formula:
86
Rate of dep. for a year = dep. Exp. For the year / (Net Block of the previous yr. +
(Net purchases or sales of assets for the year / 2)).
Thus, for the future we assume that the rate of depreciation would be the average
of these separate rates for the 5 years. (Refer Exhibit 4(v)).
The projected depreciation for the next years is calculated using the formula:
Depreciation = (Previous years Net Block + reinvestments for the year) * average
rate of depreciation. (Refer Exhibit 4(vi)).
For finding the expected tax rate for the future, we first find the average rate of
tax for the last 5 years. Here we find the Effective Tax Rate and the Cash Tax Rate
where
Effective tax rate (in %) = (Provision for taxes / Adjusted PBT (deducting write
offs)) *100
Cash tax rate (in %) = (Taxes paid / Adjusted PBT (deducting write offs)) * 100
It is then averaged out for the past 5 years.
Therefore, Avg. CTR (in %) = 19.86
However, the corporate tax rate is expected to reduce from the current 36.75% to
30. in the future. Thus, we assume that the tax rate used for the projections for
future would be at 30% level. (Refer Exhibit 4(ii) and 4(iii)).
Projection for cash flow from investment activities is the sum of projections of the
following: Investments in Fixed Assets, Investments in securities, Replacements
and interest & dividend earnings. These projections are done with the help
previous 5 year’s average figure as well as other assumptions made. These
projections indicate cash outflows because of investments activities. (Refer Exhibit
4(iv)).
The ratio of Working Capital to Operating Income is calculated for the last 5
years. This was 40% in 1999 and it fell down to 11.5% in 2004. Thus, we assume
that this ratio would continue for the future also. The projected working capital can
be calculated by using the formula:
Projected W.C. = Projected operating income for the years * 11.5% (Refer Exhibit
4(vii)).
87
After doing this we determine the changes in the Working capital over the next 5
years by simply calculating the difference in the amount of Working capital.
The weighted average cost of capital (WACC) for the company can be calculated
to be 10.71%.
From all the above calculations we can determine the projected cash operating
profits after taxes and the projected free cash flow of the firm.
Cash operating profits after taxes = (COPBT – Dep.) * (1-T) (Refer Exhibit
4(viii)).
Projected FCFF = Projected COPAT + Changes in W.C. + Projected CFIA While
projecting the future FCFF for the 6th year onwards we use summation with the
help of the infinite series, the actual formula being
Projected FCFF for 6th year onwards = Projected FCFF of the 6th year
(WACC – Long-run growth rate)
Each of these is discounted to the present value as on 2005 with the help of
WACC. (Refer Exhibit 4(ix)). Hence,
Present value of the firm as on February, 2005 = sum of all projected and
discounted FCFF = 26850.37
Thus, the Fair Value of the firm / share (Rs.) = (Present Value of the firm –
(Secured Loans + Unsecured Loans)) / Equity share capital.
Intrinsic / Fair Value of the share of TISCO (Rs.) = 424.18
Book value of a share = (Equity share capital + Reserves & Surplus –
Miscellaneous Expenses not written off) / Equity share capital
Book Value Of the share of Tata Steel = 118.55 (Refer Exhibit 4(x)).
Market Price of the share of Tata Steel as on 24th June, 2005 at 3.30 p.m. =
363.40
Thus, we can now say that the share of Tata Steel is selling below premium i.e.
it is under priced. This shall give indications as to whether an investor should
88
respond to purchase or sale of the share in the stock market. This entire
analysis of the intrinsic value of the share is known as the fundamental
analysis of a company. However, the information received from the
fundamental analysis is very conservative and narrow in scope of analysis. It
does not incorporate in the market factors that largely influence the price of a
company’s share. Thus, we can say that fundamental analysis is always
incomplete. In order to fill this gap of analysis, we carry out technical
analysis of the share of the company. This type of analysis is done on a daily
basis and takes into consideration the market sentiments towards a
particular company’s share.
Technical Analysis
Technical analysis does not concern itself with a company's basics or fundamentals.
Rather, technical analysis involves the study of a stock's trading patterns through the use
of charts, trend lines, support and resistance levels, and many other mathematical analysis
tools, in order to predict future movements in a stock's price, and to help identify trading
opportunities. The basic foundations or premises of technical analysis are that a stock's
current price discounts all information available in the market, that price movements are
not random, and that patterns in price movements, in very many cases, tend to repeat
themselves or trend in some direction.
Bob Prechter, a famous practitioner of technical analysis once commented that, "... the
main problem with fundamental analysis is that its indicators are removed from the market
itself. The analyst assumes causality between external events and market
movements, a concept which is almost certainly false. But, just as important, and less
recognized, is that fundamental analysis almost always requires a forecast of the
fundamental data itself before conclusions about the market are drawn. The analyst is then
forced to take a second step in coming to a conclusion about how those forecasted events
will affect the markets! Technicians only have one step to take, which gives them an edge
right off the bat. Their main advantage is that they don't have to forecast their indicators."
89
A very large number of technical indicators have been developed over the years,
including the widely used overbought/oversold indicators such as the Relative Strength
Index, and the trend following indicators such as Moving Averages. While technical
analysis can be a great help in trading the market, no technical indicator is infallible.
Further, technical analysis is only as good as its interpreter. Finally, a significant of time
must be spent in learning the principles of technical analysis, and in how to properly
interpret the various charts and other technical indicators.
FINANCIAL ANALYSIS (Refer Exhibit-5(i), (ii), (iii) and 6(all))
Profitability
The fortune of the Steel industry changed and so did TISCO. After experiencing the
lowest profit in 2002 which was the worst year for steel industry, when the global demand
was at an all time low the fortunes changed. TISCO is also one of the most cost efficient
steel producers in the world. For 2002-2003, TISCO reduced specific energy consumption
by 3.90 percent, raw material consumption by 3.50 percent and increased utilization of
waste from 72.60 percent to 79 percent.
The current years profit is more than Rs 1700 crores which will eventually get better with
the reduction in the Corporate Tax Rate. The growth rate in profits has been around
30%.The acquisition of Nat steel has added capacity to the company and Tata Steel is all
set to be among the top producer of steel in the world. It is also entering foreign markets
like South Africa, South Korea and Japan. With the global demand in steel at an all time
high and manifold increase in infrastructure, manufacturing activity etc the profits are
going to be higher.
Turnover
The turnover of the company has consistently increased owing to the increase in global
steel demand from 2003 onwards. The steel industry has recovered after a series of low 90
growth for years. The turnover was around Rs 12000 crores in 2003-2004.It experienced a
growth of 22% from the previous year.
Return on Equity
The Return on Equity has considerably increased owing to the increase in Profits after
Tax. The ROE is the indicator of as to how much return the company has been able to earn
per rupee invested by the shareholders of the company. The current rate of ROE is
46. which is high because the margins and sales have considerably improved. The
company has been specifically able to control its costs and has emerged as one of the
lowest cost steel producer in the world.
Debt Equity Ratio
The Debt Equity Ratio is interesting to watch in case of TISCO. Steel Industry by nature is
capital intensive. Thus it requires higher debts. The Debt component has come down over
the last three years. Currently it is at .77 coming down from 1.92 in 2002.The year 2002
was tough for the industry as a whole. The demand was going down and thus needed debt.
In the year 2002 the company had paid an interest amount to Rs 430 crores and had debt
amounting to Rs 4300 crores. In 2003-04 the debt component came down to Rs 3300
crores and the company incurred interest expenses amounting to Rs 230 crores.
The global demand for steel is at an all time high now and the industry is getting
financially stronger. The lower interest burden has helped in achieving higher profits.
TISCO has reduced its total debts by Rs 475 crores as on October 31, 2003, resulting in
lower interest cost. This is in line with the company's decision to prepay its high-cost
debts. It is also in talks with lenders to settle more debt. The total debt of the company as
on March 31, 2003, stood at Rs 4,225.61 crores as against Rs 4,705.48 crores in the
previous fiscal. The interest burden for the first six months of 2003-2004 stood at Rs
133.48 crores as against Rs 166.61 crores in the same period of the previous fiscal,
representing a 20 per cent reduction. The company is talking to a few lenders and is
willing to pay 50 per cent of the premium on debt. The company clocked a 25.38 per cent
91
fall in interest from Rs 76.41 crores to Rs 57.02 crores for the second quarter of 2003-
2004. Interest as a percentage of sales dropped from 3.88 per cent to 2.18 per cent for
the same period.
Asset Turnover Ratio
The asset turnover ratio has increased from 78% to 89%.This reflects upon the efficiency
of the company. The Net Profit Margins are at 16% experiencing a huge rise from 2.78%.
The Margins are set to increase for the next year owing to greater profits and cost
efficiency. The company is in a good position since it has been able to sustain its costs and
the company is fundamentally strong.
PE Ratio
The PE Ratio tells us how much the investors are willing to pay in the market for every
rupee earned by the company. The ratio has gone up from 4.88 in 2003 to 7.25 in
2004.The EPS has gone up from Rs5.51 in 2002 to Rs 47 in 2004.The ratio was very high
in 2002 owing to a very low EPS but the investors were actually ready to pay a higher
price. The industry is cyclical in nature and the investors forecasted a higher growth in
coming years. Profits, owing to greater profits and optimistic forecasts the PE is higher
than last year.
Net Working Capital
The Net Working Capital for a company is the difference between the current assets and
the current liabilities. Current Assets include receivables, bank and cash balance, inventory
and other miscellaneous expenses. Current Liabilities includes creditors and outstanding.
The tremendous fall in the net working capital is either due to the fall in the
current assets or a rise in the current liabilities. Here we can say that the debtors have
been under control to large extent and for the year 2004 it was extremely low. Having a 92
low net working capital is good for a company. Along with this there was a rise in the
current liabilities for the year 2004.
GROSS WORKING CAPITAL
Over the previous year, the working capital of the different departments has increased in
terms of days of debtors and days of inventory. This has been observed for Long Products,
Flat Products and Ferro Alloys & Minerals Division. (Refer Exhibit 7(iv), (v) and (vi)).
Inventory
The level of inventory in the different departments has increased to some extent. (Refer
Exhibit 7(i) and (ii)).
Debtors
The debtors are under control for almost all departments. As per 2004-05 data the actual
debtors were less as compared to the target debtors, which gives a positive signal that less
money is blocked in the debtors. It reduces the liquidity of the company. (Refer Exhibit
7(iii)).
93
INFORMATION TECHONOLGY SERVICES AT TATA STEEL
ROLE OF IT
Enable and Act as a Promote improve core
business processes
competitive differentiator
‘Open and Knowledge-
based’ culture
Information Technology Service has different computing technologies, networking
and infrastructure facilities:
Computers: Large Computers, Mid-Range Computers and Desktop Computers.
Networking: Campus Local Area Network (LAN), Countrywide Wide Area
Network (WAN).
Infrastructure: Development and Services Support Facilities.
MAJOR PROJECTS UNDERTAKEN
1. SAP for Finance and Accounts : SAP
implementation was extended through a new project called ‘Rupantar’ to Steel Works,
Administration, Town, Medical, Rings & Agrico and Secondary Products with functions
of Financial Accounts, Costing, and Materials Management along with Production
Recording and Plant Maintenance. The key business drivers for this project were better
revenue management through better product
Mix decisions, faster closing of accounts and integrated inventory management for
purchased items. The SAP project was implemented on 1st December 2001 in a record 94
time of 10 months from the time it was conceived. Due to which Tata Steel was adjudged
the Best SAP R/3 implementation in India by SAP.
2. Information System for CRM
3. Data warehouse and data mining for Hot Strip Mill
4. Office automation
5. E-application such as e-Procurement and e-Tender
6. Web sites for different divisions and several intranet applications
7. Knowledge management site for sharing and dissemination of knowledge.
SAP
SAP, an ERP system, was implemented at Tata Steel for better customer order
management and fulfillment. SAP was introduced in the areas of sales and distribution,
material management, Financial-Account Receivables and control.
Some of the benefits from SAP are:
It will lead to complete transparency in customer ledgers, orders, stock ledgers,
dispatches and credit lines.
It is Internet enabled and will allow customer to use SAP to get information on
their orders.
Marketing and sales decisions will be made on the basis of data available online.
Lead time required to process orders, settle complaints, develop new products and
reconcile accounts, in substantially lesser time.
Online availability of data will further improve Inventory Management in the stockyards,
leading to better customer service.
95
TATA STEEL
HUMAN RESOURCE POLICY
Tata Steel recognizes that its people are the primary source of its competitiveness.
It is committed to equal employment opportunities for attracting the best available talent
and ensuring a cosmopolitan workforce.
It will pursue management practices designed to enrich the quality of life of its
employees, develop their potential and maximize their productivity.
It will aim at ensuring transparency, fairness and equity in all its dealings with its
employees.
Tata Steel will strive continuously to foster a climate of openness, mutual trust and team
work.
HR goal: “Creating a World Class development environment”
The Business plan of Human Resource Management is
1. To improve employee satisfaction and commitment
1. Create a world-class development environment and
2. Control employee costs.
The employees of Tata Steel are categorized under two broad types:
Officers and Unionized Employees
96
PROCESS OF EMPLOYEE MOTIVATION
Identify Motivational Factors through: Communication
Informal Meeting Focused HR group discussion
Reinforce these in work
environment
Employee Satisfaction Index (ESI) feedbacks
Employee Motivating Factors Recognition by peers/seniors
Rewards
Measure motivation
through ESI
Performance Management System
Employee Participation : The organization seeks to bring about an improvement in the
various processes through cooperation and innovation. For this purpose, the organization
has a system of forming cross-functional task forces. Cross unit communication is
achieved through Management Council, knowledge communities, Quality Circles
presentations/competitions, etc. The effectiveness of communication mechanism is
measured through continuous and regular feedback, satisfaction surveys, Employee
Opinion Survey, intranet usage, etc.
Tata Steel also encourages job and career related development and learning for its
employees through the Personal Development Plan (PDP) for the officers. It also
encourages mid-year and year-end talent reviews through the Performance Management
System known as EDGE ( Ensuring Development and Growth of Employees). This helps
in identifying the strengths, areas for improvement and development needs of officers.
A new initiative called ‘TEJASWANI’ was started to impart the female workers with
higher operational skills to enable them to take higher level jobs.
97
Succession Planning at Tata Steel is done for all critical positions in the organization.
Various criteria such as qualification, experience and competency are listed down in the
Job Analysis Sheet and the individuals matching with the requirements are then identified.
The prospective candidates are scanned by the peer group and by the seniors.
Recruitment: The identification of characteristics and skills needed for any job is done
through the preparation of the Job Analysis Sheet. It specifies the required qualifications,
work experience for the job, key functional responsibilities, key results areas,
competencies necessary for the job. Recruitment at the entry level is done through campus
selections at premier engineering and management institutions as well from the internet
websites. It encourages having professionals from diverse backgrounds. Training is also
given to the employees’ dependants, known as the Basic Plant Training Schemes, which is
used for the recruitment of workmen.
While recruiting Tata Steel does not discriminate on the basis of gender, religion, or social
status.
Retention: Tata Steel makes all provisions to fill up the expectation gap. At the point of
the Pre-placement talks itself, the company communicates the ‘correct’ picture of the
company, working/living conditions and the compensation package so that the employees
about the company and it shall reduce the attrition rate because of these reasons.
Induction process: The employees are made aware of the organizational culture and
business direction through the formal induction process. The new appointees are
mentored by a senior official so as to guide them in case of difficulties.
Training: Tata Steel provides training programme to its employees and the officers to
meet up with the advancement in technology and the nature of diversity in the
organization. (Refer Exhibit 8).
98
Employee Safety: Tata Steel has identified 2063 problem areas which are prone to
accidents and risks. A special Task Force has been formed in July 2002 which focuses on
safety of the people. Occupational Health Department takes care of the health check-ups of
the employees. It also initiates Health Awareness Training Programmes regularly along
with an on-line feedback system. They are provided with healthy and hygienic working
environment. Tata Steel is the first steel plant in India and one amongst the very few plants
to be ISO 14001 certified. This encourages regular internal and external audits to be
carried out on environment, health and safety of employees.
Other opportunities: The employees at Tata Steel are provided with housing schemes,
club membership, schooling opportunities, etc.
KEY SHORT TERM AND LONG TERM HR PLAN HR PLAN ELEMENT ACTION PLAN Control employee cost (Strategy objective: Lowest cost producer)
Right sizing Variable pay system Divest non-core business Create leaders who will build our future (Vision element)
Workers & supervisors training Preparing workers to occupy supervisory position Officers development through rotation & succession planning Improve employee satisfaction & commitment (Vision element)
Reward high performance through variable pay To ensure ‘Parivesh’ – Annual plan to improve Health safety and environment.
99
FUTURE OUTLOOK
The Indian steel industry has been passing through a rough phase in the recent times.
Excess capacities, huge workforces and lack of better technologies plague the
sector. Even, globally the situation is no different either. The current performance of steel
companies across the world shows that they have much in common. They have all been hit
hard by the demand crunch, with the vast majority sinking into a sea of red. A global
cyclical downswing is very clear. The worry, however, is that the global steel industry is
heading for larger trouble than what has so far been presumed. According to estimates by
International Iron & Steel Institute (IISI), crude steel production in 1998 was down by
only 2.3 per cent compared to 1997. And 1997 was a record production year of 799
million tonnes.23
The fluctuating growth rates shown by developed countries after the 1973 oil crises were
offset by sustained demand for steel in the developing world. The Asian financial crises
changed that scenario completely. Traders panicked and liquidated the excess inventory
they had booked in anticipation of higher prices. This caused a sharper price drop than
warranted. The panic also resulted in a disproportionate fall in steel raw material prices--
such as scrap, pig iron, DRI, coal and coke. The global recession also brought down ocean
rates, which increased the ability of some manufacturers to reduce prices further. Analysts
estimate that for most steel products the price drop has been as much as 50 per cent. This
has shattered the steel industry worldwide.
Restructuring seems to be the only way-out. But most steel companies in developing
countries had undertaken massive privatization programme between 1992 and 1996. That
doesn't seem to have helped them much. New private players who had entered the steel
business in a big way find their capital costs far too exorbitant, bringing down their
chances of survival sharply. The only conclusion that emerges is that developed countries
have benefited at the expense of developing countries.
23 Steel Ministry of India 100
The Road ahead………..
1. Tata Steel expects to grow from a Gross Turnover of around Rs. 10000 Crores in
2003 to Rs. 25000 Crores by 2007-08.24
2. The profit target of the company is to increase PAT from around Rs. 1000 Crores
in 2003 to Rs. 3000 Crores by 2007-08.25
3. The company identifies that it needs to venture into New Business that would be
more profitable other than steel, its core business, because of oversupply in the
Global Steel Industry.
4. Tata Steel is in a growth mode even in the steel business through the organic
(internal growth) and acquisition routes.
5. Tata Steel is targeting to be the World Class Industrial Enterprise from a World
Class Steel Company.
6. Tata Steel is developing World Class products and brands to be sold through a
World Class distribution system that would operate at World Class efficiencies
with World Class Knowledge and expertise and yet have roots in the Indian
environment that nurtures the Tata Group and Tata Steel.
24 Facts About Tata Steel, 2003 25
Facts About Tata Steel, 2003
101
EXHIBITS
EXHIBIT-1
STEEL MARKET PRICES (AS ON 01-01-05) (Rs. per tonne)
ITEM KOLKATA DELHI MUMBAI CHENNAI Pig Iron 18875 20000 19200 18000 Billet 100mm 22250 25000 23600 22500 Blooms 150*150mm 22850 24000 23600 21500 Pencil Ingots 20125 21000 22700 22000 Wire Rods 6mm 25450 26200 26600 29000 Wire Rods 8mm 25350 26200 26200 28500 Rounds 12mm 24250 24500 28200 26500 Rounds 16mm 25250 24500 28000 25500 Rounds 25mm 24850 24500 28000 25500 Tar Steel 10mm 23900 27900 28000 26500 Tar Steel 12mm 23875 27500 27750 26000 Tar Steel 25mm 24100 27700 26500 27000 Angles 50*50*6mm 27450 29500 28000 30500 Angles 75*75*6mm 27500 28500 27650 30500 Joists 125*70mm 30450 31500 29500 32500 Joists 200*100mm 29650 31000 29500 32000 Channels 75*40mm 28050 29400 28250 30500 Channels 150*75mm 32000 29500 28250 30500 Plates 6mm 32325 31400 31800 31800 Plates 10mm 31900 31400 32250 32500 Plates 12mm
31750 31800 31750 31000 Plates 25mm 32125 32200 32750 32700 HR Coils 2.00mm 33100 34000 33100 33500 HR Coils 2.50mm 32625 31800 32625 32500 HR Coils 3.15mm 32150 31800 32100 32000 CR Coils 0.63mm 34600 34500 35750 35000 CR Coils 1.00mm 34000 33600 35000 35000 GP Sheets 0.40mm 37350 39000 38250 37000 GP Sheets 0.63mm 36225 36000 38000 36000 GC Sheets 0.40mm 37350 39400 38500 38000 GC Sheets 0.63 36400 36400 37750 38000 Melting Scrap H M S-I 16375 17800 15000 15800 Melting Scrap H M S-II 15775 17200 14600 15500 Sponge Iron (Coal Based)
12275 15800 14500 16500
Source: The Iron and Steel review, January 2005 issue
- a -
EXHIBIT-2
STEEL MARKET PRICES (AS ON 15-01-05) (Rs. per tonne)
ITEM KOLKATA DELHI MUMBAI CHENNAI Pig Iron 18225 20000 19000 18200 Billet 100mm 21750 25000 23550 22600 Blooms 150*150mm 21900 24000 N.A. 21000 Pencil Ingots 20525 22300 22750 22000 Wire Rods 6mm 25550 27800 26300 29000 Wire Rods 8mm 25200 27800 26000 28000 Rounds 12mm 24400 26500 28200 26600 Rounds 16mm 24400 26500 28000 26500 Rounds 25mm 25000 26500 28000 25500 Tar Steel 10mm 24250 28700 28250 26500 Tar Steel 12mm 24050 28000 28125 26000 Tar Steel 25mm 24425 28200 26750 27000 Angles 50*50*6mm 27025 29500 27875 30000 Angles 75*75*6mm 27025 28500 27500 30000 Joists 125*70mm 31750 31500 29250 32000 Joists 200*100mm 30250 31500 30000 32000 Channels 75*40mm 28325 29400 28250 30000 Channels 150*75mm 32175 29500 29875 30000 Plates 6mm 32400 33000 32625 33000 Plates 10mm 31975 33000 32875 34000 Plates 12mm 31450 33500 32625 33000 Plates 25mm 32325 34000 33350 33500
HR Coils 2.00mm 33400 35000 33750 34500 HR Coils 2.50mm 32575 33000 33625 34500 HR Coils 3.15mm 32250 33000 33250 33500 CR Coils 0.63mm 34250 35200 36750 36000 CR Coils 1.00mm 34000 34600 35500 36000 GP Sheets 0.40mm 37450 41000 38750 37500 GP Sheets 0.63mm 35285 36600 38500 36500 GC Sheets 0.40mm 37450 41000 39000 38500 GC Sheets 0.63 35975 37500 38500 38000 Melting Scrap H M S-I 16450 17800 15500 16500 Melting Scrap H M S-II 15925 17200 15000 16000 Sponge Iron (Coal Based)
12850 15800 15000 17000
Source: The Iron and Steel review, February 2005 issue
- b -
EXHIBIT-3
LETTER OF CREDIT & BILL DISCOUNTING WITH HSBC
EXHIBIT-3(i)
LATE RECEIVAL OF CHEQUE BY THE BANKRATHI ISPAT (in %)
5 11 0-2 days
133,4 days
135,6 days
15 7,8 days
9,10 days
11,12,13,14,15 2223
EXHIBIT-3(ii)
LATE RECEIVAL OF CHEQUE BY THE BANK SHAH ALLOYS (in%)
4 4 0-2 days39 17 3,4 days 5,6 days 7,8
days 9,10
days
13 11,12,13,14,15 days17 4
- c -
16 AND ABOVE days
EXHIBIT-3(iii)
LATE RECEIVAL OF CHEQUE BY THE BANK JINDAL STAINLESS (in%)
0 6 11 0-2 days
31 3,4 days5,6 days7,8 days
141128
EXHIBIT-3(iv)
LATE RECEIVAL OF CHEQUE BY THE BANK STAINLESS INDIA (in%)
0 10
0-2 days15
3,4 days5 15 5,6 days 7,8 days 9,10 days30 25
EXHIBIT-3(v)
11,12,13,14,15
days 16 AND
ABOVE days
TOTAL SAVINGS SHOWN FOR DIFFERENT PARTIES SINCE 2005 CUSTO
MER
SAVING FOR 2005
RATHI 321041.0405 SHAH ALLOYS
248139.0777 JINDAL 161362.7016 STAINLESS INDIA 40788.32008 TOTAL
SAVIN
GS
771331.1399 Source: Data collected from HSBC Bank
- d -
EXHIBIT-4
FUNDAMENTAL ANALYSIS
EXHIBIT-4(i) Vertical analysis of Income statement
Year 2004 2003 2002 2001 2000 1999 Operating Income 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Expenses Material
Consumed 0.3109 0.2557 0.2603 0.2408 0.2458 0.2808 Manufacturing Expenses 0.1700 0.1928 0.2260 0.2344 0.2429 0.2397 Personnel Expenses 0.1237 0.1387 0.1616 0.1336 0.1554 0.1679 Selling Expenses 0.0075 0.0891 0.0932 0.0934 0.1047 0.1032 Adminstrative Expenses
0.0643 0.0878 0.0977 0.0618 0.0615 0.0596
Expenses Capitalised (0.0142) (0.0069) (0.0065) (0.0315) (0.0443) (0.0346) Cost Of Sales 0.6623 0.7571 0.8322 0.7324 0.7661 0.8165
Operating Profit 0.3186 0.2353 0.1549 0.2556 0.2230 0.1656
Other Recurring Income
0.0192 0.0075 0.0128 0.0120 0.0110 0.0178
Adjusted PBDIT( COPBT)
0.3377 0.2429 0.1678 0.2676 0.2339 0.1835
EXHIBIT-4(ii) Tax Rate
Year 2004 2003 2002 2001 2000 1999 Provision for Taxes 920.44 250.79 16.10 49.20 54.50 33.50 Deferred
Taxes
0.26 11.69 30.60 0.00 0.00 0.00
Paid
Taxes
920.70 262.48
46.70 49.20 54.50 33.50
Adjusted PBT( after write offs)
2828.36 1190.64 211.50 675.34 326.86 180.61
ETR 32.543 21.063
7.612 7.285 16.674 18.548
CTR 32.552 22.045 22.080
EXHIBIT-4(iii)
7.285 16.674 18.548 Avg Cash Tax rate % 19.86
Avg Cash Tax rate %( last 3 yrs.) 25.56
- e -
EXHIBIT-4(iv) Future Cash Flow from investing activities
Year Projected Inv
estments in fixed
2005 2006 2007 2008
2009 2010
Assets (1,200) (1,200) (1,200) (1,200) (1,200) (1,200)Projected Investments in securities Projected
Replacements Interest & dividend earning
(300) (625)
90
(300) (650)
90
(300) (700)
90
(300) (750)
100
(300) (800)
100
(300) (850)
100
Projected
CFIA
(2035) (2060)
(2110)
(2150)
(2200) (2250)
EXHIBIT-4(v) Depreciation
Year 2004 2003 2002 2001 2000 1999
Net block 7,094.21 7,342.72 7,213.55 7,042.39
5,504.58 5,779.03
Depreciation
Expense
625.11 555.48 524.75 492.25 426.54 382.18
Net Purchases/Sell of assets (907.53) (411.65) (502.68) (597.65) (649.80) (1,118.72)
Rate of Depreciation 0.0907 0.0793 0.0773 0.0946 0.0782
Avg. Dep. Rate
0.084 0.084 0.084 0.084 0.084 0.0840
EXHIBIT-4(vi) Year 2005 2006 2007 2008 2009 2010Reinvestments or Net
purchases in asset
625 650 700 750 800 850
Future Net block 8919.21 10744.21 12644.21 14594.21 16594.21 18644.21 Depreciation
648.48 803.81 961.31 1125.11
1293.11 1465.31
EXHIBIT-4(vii)
Year 2005 2006 2007 2008 2009 2010Projected
W.C (%)
0.12 0.12 0.12 0.12 0.12 0.12
Projected Operating income 10908.41 12544.67 14426.37 16590.33 19078.88 21940.71 Projected W.C.
1254.47 1442.64 1659.03
1907.89 2194.07 2523.18
Changes in W.C.
24.27 188.17
- f -
216.40 248.85 286.18 329.11
EXHIBIT-4(viii) Year 2005 2006 2007 2008 2009 2010 Operating Income( Projected) 11999.25 13199.18 14519.09 15971.00 17568.10 19324.91 COPBT 4052.15 4457.36 4903.10 5393.41 5932.75 6526.02
Depreciation 1151.41 1252.22 1353.03 1453.84 1554.65 1655.46
COPAT= (COPBT- Dep)*(1-T)
2030.52 2243.60 2485.05 2757.70 3064.67 3409.40
EXHIBIT-4(ix) Year 2005 2006 2007 2008 2009 2010Projected COPAT 2030.52 2243.60 2485.05 2757.70 3064.67 3409.40Changes in W.C. 24.27 188.17 216.40 248.85 286.18 329.11 Projected CFIA (2035) (2060) (2110) (2150) (2200) (2250) FCFF
19.79 371.77 591.45 856.56 1150.85 1488.51
Value of firm in terminal year-2010, Rs crores
39482.96
Discounted Value
19.79 335.81 482.55 631.24 766.08 24634.70
EXHIBIT-4(x) Present value of firm, Rs. Crore 26850.37 Present value of firm, $ billion 5.97
Fair Value of Firm/ share (Rs.) 424.18
Source: Calculations done on the basis of past financial statements
- g -
EXHBIT-5
EXHIBIT-5(i)
FINANCIAL HIGHLIGHTS
INCOME STATEMENT
Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00 Income : Operating Income 10,699.318,716.546,704.696,834.546,089.42Expens
es
Material Consumed 3,391.822,246.061,767.901,665.771,513.16 Manufacturing Expenses 1,854.921,692.971,535.041,621.191,495.45 Personnel Expenses
1,349.591,217.721,097.60
924.34 957.07
Selling Expenses 81.9 782.96 632.67 645.78 644.92 Adminstrative Expenses
701.43 770.78 663.26 427.21 378.48 Expenses Capitalised
-155.28 -60.79 -44.05 -217.76 -272.51 Cost Of Sales 7,224.386,649.705,652.425,066.534,716.57 Operating Profit 3,474.932,066.841,052.271,768.011,372.85 Other Recurri
ng Income
209.1 66.07 87.13 83 67.54
Adjusted PBDIT 3,684.032,132.911,139.401,8 51.011,440.39Financial Expenses 230.56 342.41 403.15 481.9 529 Depreciation 625.11 555.48 524.75 492.25 426.54 Other Write offs
0 44.38 0 201.52 157.99 Adjusted PBT 2,828.361,190.64 211.5 675.34 326.86 Tax Charges
920.44 250.79 46.7 49.2 54.5 Adjusted PAT 1,907.92 939.85 164.8 626.14 272.36 Non Recurring Items -201.47 26.26 33 -77.63 152.46
Other Non Cash adjustments
39.77 46.2 7.1 4.93 -2.23
Reported Net Profit
1,746.221,012.31 189.19 553.44 422.59 Earnigs Before
Appropriation 2,053.671,228.13 419.66742.37513.09
Equity Dividend 368.98 295.19 147.11 196.09 154.86 Preference Dividend
0 0 2.07 0 0 Retained Earnings
1,637.42 895.12 270.27 524.76 341.19
Source: Annual Reports of past 5 years
- h -
EXHIBIT-5(ii)
BALANCE SHEET
BALANCE
SHEET
Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00 SOURCES OF FUNDS
Owner's Fund Eq
ui
ty
Sh
ar
e
C
ap
ita
l
Sh
ar
e
A
pp
lic
ati
on
M
on
ey
Pr
ef
er
en
ce
Sh
ar
e
C
ap
ita
l
369.1
8 0
0
367.9
7 1.21
0
367.9
7 0
0
367.9
7 0
140
367.97 0
150
Reserves & Surplus 4,146.68 2,816.843,077.994,380.464,
040.43
Loan
Funds
Secured Loans 3,010.16 3,667.634,056.934,129.964,
140.91
Unsecured
Loans
363.12 557.98 650.89 542.26 766.32
Total 7,889.14 7,411.638,153.789,560.659,4
65.63
USES OF FUNDS
Fixed Assets
Gross Block 12,505.83 12,192.7111,412.2910,762.478,746.53 Less : Accumulated Depreciation 5,411.62 4,849.994,198.743,720.083,241.95 Net Block 7,094.21 7,342.727,213.557,042.395,504.58 Capital Work-
in-progress
763.64 201.08 330.15 495.71,919.48
Investments N
e
t
C
u
r
r
e
n
t
A
s
s
e
t
s
2,194.12 1,194.55
912.74
846.92
803.1
Current Assets, Loans & Advances 4,933.61 4,484.623,329.173,225.613,025.11 Less :
Current Liabilities &
Provisions 7,252.41 5,811.344,620.822,970.262,614.76Total Net Current Assets -2,318.80 -1,326.72-1,291.65 255.35 410.35Miscellaneous exp
enses not written
155.97 0 988.99 920.29 828.12
Total 7,889.14 7,411.638,153.789,560.659,
465.63
Note : Book Value of Unquoted Investments Mar
ket Value of Quoted Investments
1,878.4
3
2,031.6
9
752.67
798.26
485.12
401.23
465.54
381.38
460.7
5
455.33
Contingent liabilities 2,669.02 1,580.701,309.841,454.371,58
4.59
Source: Annual Reports of past 5 years
- i -
EXHIBIT-5(iii) CASH FLOWS
Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00 Profit Before Tax 2,665.96 1,262.50 251 602.44 476.5
9 Depreciation 625.11 555.48 524.75 492.25 426.54
P and L On Sale Of Assets -32.17 -21.27 -27.68 -6.31 -142.22
P and L On Sale of Investments -1.24 -4.62 -22.83 -1.91 -10.22
Interest Income -21.31 -34.05 -31.22 -35.85 0
Interest Paid Net 140.81 342.41 403.15 412.39 -389.98
Interest Net 0 0 0 0 355.48
Dividend Received -98.34 -23.25 -49.62 -44.2 0
Dividend Net 0 0 0 0 -31.02
Misc. Income 0 -4.57 0 0 0
Amortisation Of Expenses 236.65 230.95 227.02 201.52 0
Payment towards VRS -267.75 -277.01 -189.35 -197.09 -166.11
Provision And WO Net 0 0 0 0 159.12
Provision For Dimunition In Investments 18.37 0.43 17.82 0.47 0
Provisions For BadDebts NPA 0 43 0 0 0
Trade And Other Receivables 364.73 148.88 268.86 -133.87 -19.21
Inventories -96.13 -24.28 -99.82 23.08 71.66
Trade Payables 305.98 127.9 -55.08 208.49 37.22
Tax Provision 0.7 0.6 0.6 0.2 0
Direct Taxes Paid
-926.93 -229.95 -63.47 -66.16 -64.81 Net CashFlow-
Operating Activity
2,914.44 2,093.15 1,154.13 1,455.45
703.04
Purchase Of Fixed Assets -960.33 -451.23 -534.95 -605.45-1,148.27
Sale Of Fixed Assets
52.8 39.58 32.27 7.8 498.47 Purchase Of Investments -4,615.68-1,773.26 -794.62 -52.82 -302.99 Sale Of Investments 3,470.24 1,368.51 657.02 0.03 80.21
Interest Received 24.99 30.54 33.94 34.6 44.43
Dividend ReceivedInvesActivity 98.34 23.25 49.62 44.2 31.02
Inter Corporate Deposits 48.56 -27.55 -3.49 -48.21 -12.16
Investment In Subsidiaries -1.55 0 0 0 0
Extraordinary Items 0 0 60.51 22.29 0
Net Cash Used In Investing Activity -1,882.63 -790.16 -499.7 -597.56 -809.29 Proceeds From Issue Of Pref. Captl
0 0 -140 -10 0 Proceed From Issue Of Cap. Incl. Sh.
Prem. 0 0 0 0 150
Proceed from oth. LTerm Borr 318.71 593 1,178.95 462.251,046.10Repayment Of Borrowings -1,036.04-1,281.27 -1,143.35 0 0Dividend Paid -292.8 -145.53 -185.96 Interest Paid -144.47 -341.29 -385.87 -411.92 0 Others From Fin Activity
0.41 25.23 1.77 4.2 0 Of Other LTerm Borr 0 0 0 0-1,077.80 Repayment Of Short Term Borrow
0 0 0 -697.26 0 NetCash Used in Fin. Activity -1,154.19-1,149.86 -674.46 -812.04Net Inc/Dec In Cash And Equivlnt
-122.38 153.13 -20.03 Cash And Equivalnt Begin of Year
373.12 219.99 239.23 193.38Cash And Equivaln
t End Of Year
250.74
373.12
219.2 239.23
193.38Source: Annual Reports of past 5 years
- j -
EXHIBIT-6
Source: Calculations done on the basis of past financial data
FINANCIAL ANALYSIS
EXHBIT-6(i)
NET PROFIT (Rs.Crores)18
00
2000 1746
1600 1400
1200
1
0
0
0
800 553
1012
600 282 42
3 400 2051999 2000 2001 2002 2003 2004
YEAR
EXHIBIT-6(ii)
EARNINGS PER SHARE
47.325040
27.4330
E 20 14.64P 7.
6711.26
S 10 0 5.51
1999 2000 2001
YEAR
- k - 2002 2003 2004
EXHIBIT-6(iii)
TURNOVER (Rs. Crores)14000 12070
12000
9844
10000
8000 69436336
7810 7683
6000
T
4000 2000 0
1999 2000 2001 2002 2003 2004YEAR
EXHIBIT-6(iv)
RETURN ON AVERAGE NETWORTH5035.88 40
30 14.38 46.28
20 7.65 11.5
1 10 6.38R 0
1999 2000 2001 YEAR
2002 2003 2004
EXHIBIT-6(v)
DEBT-EQUITY RATIO
2.5 1.9
2 2
1.5 1.37 1.32 1.18 1.33
D1/ E
0.5 0
0.77
1999 2000 2001
YEAR
- l -
2002 2003 2004
EXHIBIT-6(vi)
ASSET TURNOVER RATIO (in %)
100 78.16 89.96
80 63.59 63.2
8 60
A 40
T R20 0
1999 2000 2001 YEAR
2002 2003 2004
EXHIBIT-6(vii)
PRICE-EARNING RATIO
20 17.72 7.2
5 13.51
1510.38.3
610
5
0
1999 2000 2001 YEA
R2002 2003 2004
EXHIBIT-6(viii)
NET WORKING CAPITAL (Rs. Crores)
1600 14261400 1200 1197 1138 1086
958
1000
800
N 600 400
200 0 84
1999 2000 2001 2002 YEAR 2003 2004
- m -
EXHIBIT-6(ix)
CURRENT RATIO
2 1.791.65 1.55 1.541.5 1.36
1.02
1
0.5
0
1999 2000 2001 YEAR
2002 2003 2004
EXHIBIT-6(x)
RESRVES & SURPLUS (Rs. Crores)
5000.0 3796.5 4040.4 4380.5 4146.7
4000.0 3078.0 3000.0
2816.8 R S & 2000. 0 1000.0 0.0
1999 2000 2001 YEAR
2002 2003 2004
EXHIBIT-6(xi)
INVESTMENTS (Rs. Crores)
2
5
0
0
2
0
0
0
15001194.55
2194.12
1000 585.44 803.1 846.92 912.74I 500 0
1999 2000 2001
YEAR
- n -
2002 2003 2004
EXHIBIT-6(xii)
CASH FLOW FROM OPERATING ACTIVITY (Rs. Crores)3500 2914.4
4 3000
2093.152500
2000
CF 1500 703.04 1043.53 1154.13
O
A
1000
500
481.9
0
1999 2000 2001 2002 2003 2004
YEA
R
EXHIBIT-6(xiii)
CASH FLOW FROM INVESTMENT ACTIVITY (Rs. Crores)2000 1882.6
3 1500
1000 792.51 809.29 597.56 790.16
C F 499.7I A
500 0
1999 2000 2001 YEAR
2002 2003 2004
EXHIBIT-6(xiv)
CASH FLOW FROM FINANCING ACTIVITY (Rs. Crores)
1500 1149.86 1154.19
1000 674.46C 500 217.39
36.56
400.12
0
1999 2000
2001 2002 2003 2004
YEAR
- o -
EXHIBIT-6(xv)
DIVIDEND PAYOUT RATIO (in %)80
57.86
6040.6839.32
72.91
D 40 20 032.9 23.84
1999 2000 2001 YEAR
2002 2003 2004
EXHIBIT-6(xvi)
INTEREST COVERAGE RATIO
2
5
2
0
1
5
10 5.14
22.82
5 2.05 2.32 2.6 1.68I 0
1999 2000 2001 YEAR
2002 2003 2004
EXHIBIT-6(xvii)
AVERAGE DEBTORS TO TURNOVER (in %)
25 20.1420 17.81 15.86 15.48
15 10.3810 6.7
5 5
D 0
19992000 2001
YEAR
- p -
2002 2003 2004
EXHIBIT-6(xviii)
AVERAGE INVENTORY TO TURNOVER (in %)15 12.39
10.73
10 9.01 8.95 7.72 7.3
7 5
0
19992000 2001 YEA
R2002 2003 2004
EXHIBIT-6(xix)
PBT/TURNOVER (in %)30 2
5 20 14.39
15 7.758.74
24.59
10 5 0 5.49 3.71999 2000 2001
YEAR
- q -
2002 2003 2004
EXHIBIT-7
EXHIBIT-7(i)
DIVISION-WISE INVENTORY
DIVISI
ON 2004-05 2003-04
LONG PRODUCTS 130.84 94.94 FLAT PRODUCTS 425.70 419.07 RM & IM 203.86 250.94 SHARED SERVICES 28.44 38.00
SUPPLY CHAIN (MRO) 67.27 65.65
TOTAL STEEL DIVISION 856.11 868.60 INTERNATIONAL TRADE 19.79 30.68
FERRO ALLOYS & MINERALS 113.70 78.09 WIRE DIVISION 36.67 32.68
TUBE DIVISION 85.84 79.65
RINGS & AGRICO 30.41 21.78
BEARINGS DIVISION 29.32 25.92
SECONDARY PRODUCTS 10.16 18.20
TCIL CONVERSION 13.02 13.40
GROWTH SHOP 4.53 6.85
OTHERS (TM & SS) 0.45 0.56
TOTAL
1200.00 1176.41
Source: Tata Steel Intranet Web Site
EXHIBIT-7(ii)
CATEGORY-WISE INVENTORY
CATEGOR
Y AVERAGE 2004-05
AVERAGE 2003-04
FINISHED & SEMI-FINISHED 796.84 584.50 RAW MATERIALS 323.56 255.98 STORES & SPARES 338.56 319.31 GRAND TOTAL
1458.96 1159.79
Source: Tata Steel Intranet Web Site
- r -
EXHIBIT-7(iii)
DIVISION-WISE DEBTORS DIVISION AVG. DEBTORS TARGET DEBTORS
2004-05 2004-05 LONG PRODUCTS 42.04 60.34
FLAT PRODUCTS 247.19 189.23
RM & IM
65.67 63.11
TOTAL STEEL DIVISION 354.9 312.68
INTERNATIONAL TRADE 66.65 34.29
FERRO ALLOYS & MINERALS 80.19 57.99
WIRE DIVISION
64.74 51.5
TUBES DIVISION 33.36 52.78
RINGS & AGRICO 10.72 10.72
BEARINGS DIVISION 15.14 17.14
SECONDARY PRODUCTS
3.85 4.31
TCIL CONVERSION 32.87 14.98
GROWTH SHOP 14.11 13.33
TKM DIVISION 3.97 1.52
TOWN & POWER SERVICES
34.15 24.51
OTHERS 9.61 4.25
TOTAL
724.26 600
Source: Tata Steel Intranet Web Site
EXHIBIT-7(iv)
LONG PRODUCTS – GROSS WORKING CAPITAL
PERIOD
Inv. Amt. (Rs. Crores)
Inv. Days
Debtors Amt. (Rs. Crore
s) Debtors Days
Inv.+Debto r Amt.
Inv.+Debt. Days
Avg. 2003-04 97.85 21
64.15 14
272.25 35 Target 2004-05
115.00 60.34 175.34 1-Apr-04 94.94 20 42.20 9 137.14 29
1-May-04 93.66 20 42.04 9 135.70 29
1-June-04 118.44 26 50.86 11 169.30 37 1-July-04 119.75 26 32.08 7 151.83 33 1-Aug-04 122.37 27 41.47 9 163.84 36 1-Sept-04 146.54 32 50.32 11 196.86 43 1-Oct-04 125.16 25 39.55 8 164.71 33 1-Nov-04 134.02 25 37.85 7 171.87 32 1-Dec-04 153.38 30 41.18 8 194.56 38
Avg. 2004-05
123.01 27 41.98 9 165.00 36
Source: Tata Steel Intranet Web Site - s -
EXHIBIT-7(v)
FLAT PRODUCTS – GROSS WORKING CAPITAL PERIOD
Inv. Amt. (Rs. crores)
Inv. Days
Debtors Amt. (Rs. crores
) Debtors Days
Inv.+Debto r Amt.
Inv.+Debt. Days
Avg. 2003-04 200.69 33 102.12 17
302.81 50 Target 2004-05
188.96 - 64.75 253.71 1-Apr-04 187.10 31 85.73 14 272.83 45 1-May-04 187.87 31 79.36 13 267.23 44 1-June-04 228.17 36 88.62 14 316.79 50 1-July-04 242.17 38 82.09 13 324.26 51 1-Aug-04 237.95 37 90.54 14 328.49 51 1-Sept-04 242.33 39 86.28 14 328.61 53 1-Oct-04 232.60 38 85.64 14 318.24 52 1-Nov-04 243.63 40 78.33 13 321.96 53 1-Dec-04 280.63 48 63.80 11 344.43 59
Avg. 2004-05
231.07 37 83.20 13 314.28 50
Source: Tata Steel Intranet Web Site
EXHIBIT-7(vi)
FERRO ALLOYS & MINERALS DIVISION – GROSS WORKING CAPITAL PERIOD
Inv. Amt. (Rs. crores)
Inv. Days
Debtors Amt. (Rs. crores
) Debtors Days
Inv.+Debto r Amt.
Inv.+Debt. Days
Avg. 2003-04 82.00 43
60.91 32
142.91 75 Target 2004-05
113.70 57.99 171.69 1-Apr-04 78.09 41 67.99 36 146.08 77
1-May-04
92.67 47 72.98 37 165.65 84 1-June-04 109.89 54 58.76 29 168.65 83 1-July-04 115.60 51 60.66 27 176.26 78 1-Aug-04 134.40 56 96.57 40 230.97 96 1-Sept-04 132.07 53 95.01 38 227.08 91 1-Oct-04 122.46 44 95.69 34 218.15 78 1-Nov-04 140.58 48 87.08 30 227.66 78 1-Dec-04 139.74 45 81.53 26 221.27 71 Avg. 2004-05
119.57 59 80.19 40 199.76 99
Source: Tata Steel Intranet Web Site
- t -
EXHIBIT-8
STAGES OF TRAINING Nature of Diversity
Features Education and Training
Provided by/at
Professional Engineers Doctors Accountants MBAs
Technical Medical Financial Managerial
Tata Management Development Center Tata Management Training Center
Cultural
Religion Language Social
Creativity Window of the world
Tata Management Development Center Leading personalities of society Culture Associates
Locations
Working in small towns and Metros
Rural Development Social Work Environment
Tata Steel Rural Development Society Social Services & Family Initiatives Non-Government Organizations
Women
Empowerment and Assertiveness Driving Heavy Vehicles & Crane
Women Empowered training programme Sexual harassment issues training Tejaswani Effort
Tata Management Development Center Other Social Organizations HR/IR Steel
Tribal
Bring them into main stream
Training to make them at part with others before recruitment
Tribal Cultural Society Shavak Nanavati Technical Institute
Registered Relations Create
opportunity for induction
Basic Plant Training Shavak Nanavati Technical Institute
Source: TBEM 2003, ‘Building Sustainability’ by Tata Steel
- u -
BIBLIOGRAPHY
Primary Data collected from Tata Center from the different departments
Primary Data colleted from HSBC Bank
Credit Management Module CD of the Flat and Long Product
Tata World – The Tata Steel Intranet Information Kiosk
The Iron and Steel Review, January 2005 issue
The Iron and Steel Review, February 2005 issue
The Iron and Steel Review, March 2005 issue
Facts About Tata Steel, 2003
TBEM 2003, ‘Building Sustainability’ by Tata Steel
The Financial Express
The Economic Times
The Investors Guide
www.google.co.in
www.ibef.org
www.steel.nic.in
www.equitymaster.com
I
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